Aspiring EU members should peg to Euro say experts
08:10 a.m. Jun 26, 1998 Eastern
By Kolumbina Bencevic
DUBROVNIK, Croatia, June 26 (Reuters) - Countries seeking admission to
the European Union would do well to peg their national currencies or use
currency boards to prepare for the euro, leading international
economists said on Friday.
Europe's single currency presents an obvious and suitable anchor for
many countries in the region, Robert Mundell of Columbia University,
told a conference on transition economies.
''Use of the euro as an anchor generally means that countries will share
the same inflation rate as the countries in Euroland,'' he said in a
paper presented at the conference.
Mundell mentioned Poland, Hungary, the Czech Republic, Slovenia and
Estonia as Central and Eastern European countries whose talks on
membership in 1999 add momentum to the issue of convergence to the
Maastricht criteria.
''The best programme for convergence (for them) involves a tight fixed
exchange rate arrangement or currency board,'' he said.
Paul Masson, adviser in the International Monetary Fund's research
department, said he did not expect any problems for the five next EU
members to meet all the requirements, though a full convergence may take
time.
Other countries in the region ''do not stick out'' too much,
particularly as far as government deficits and inflation rates are
concerned, he added.
Most countries already use either a form of pegging, generally to the
German mark, or a currency board making their preparations for the
advent of the euro so much the easier.
''Some will as a matter of course have the euro-peg or convert the
DM-peg into the euro-peg and others may choose to do it too,'' he said.
An alternative could be inflation targeting, while allowing the exchange
rate to remain more flexible, because increased capital flows could pose
a threat to the fixed currency regimes.
Mundell saw one of the toughest tasks is choosing the initial exchange
rate at entry to a currency area.
''If a currency is overvalued relative to its anchor partners, those
countries will experience excess supply, unemployment and a lower rate
of inflation until equilibrium has been restored, he said.
''If on the other hand it is undervalued, it will experience excess
demand and inflationary pressure until equilibrium has been restored,''
Mundell said.
Differences in productivity growth among anchor partners and their price
index weights are still likely to cause diverging inflation rates, he
said.
But he said those were not strong enough arguments against the five
countries closest to the EU goal using a currency board type of
adjustment in pinning their exchange rates to the euro.
''That is the mechanism that will prevail under the monetary union and
the sooner they introduce it, the earlier convergence and admittance to
the monetary union will come about.
''You might say that if a country cannot do a currency board, if cannot
do Europe,'' Mundell said.
Copyright 1998 Reuters Limited |
