New Eu States And The Adoption Of The Euro

3551 words - 15 pages

Table of Contents
Introduction.......3
The Three Phases of Monetary Integration........4
ERM II......... 4
Maastricht Convergence Criteria.........6
Threats and Opportunities for the New States Joining the Euro.......8
Target Dates for Euro Adoption
        9
The Convergence Issue
        12
Real vs. Nominal Convergence
        12
Conclusions
        13
Bibliography
        14
Appendix
        15

        5-Year Perspective on the 10 States' Currencies against the Euro
        15

        Cyprus Pound (CYP) foreign exchange rate
        15

        Latvian Lats (lVl) foreign exchange rate
        15

        Maltese Lira (MTL) ...view middle of the document...

In 1992 the EU decided to implement Economic and Monetary Union (EMU), incorporating the introduction of a single European currency managed by a European Central Bank. The single currency - the euro - became a reality on 01 January 2002, when euro notes and coins replaced national currencies in twelve of the fifteen countries of the European Union (Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland). ERM II is an exchange rate mechanism for EU countries who are currently not taking part in the monetary union. It is up to each individual country to decide when to enter ERM II. Participation means that the domestic currency is locked to the euro. The purpose of this is to prepare the country for full membership of the monetary union.

The main purpose of this report is to show the progress of the ten new accession countries towards adoption of the European single currency. We will assess the threats and opportunities that arise for these countries, and also view the perspective of the established EU countries on these issues. The report will also describe the pathway each country must take to successfully adopt the European single currency.
The Three Phases of Monetary Integration

The EU sees the adoption of the euro by the accession countries as the final phase of their process of economic and monetary integration with the EU. The process of their monetary integration is divided into three distinct phases:

The first phase, the pre-accession phase, preceded and ended with their EU accession in May 2004. This phase left much room for independent monetary and exchange rate policy to the accession countries. In particular, they were able to choose their own exchange rate arrangements. However, they had to fulfil the acquis communautaire in the area of EMU (Economic and Monetary Union), such as making their central banks independent and completely liberalising their capital flows. Also, they had to share the aims of EMU, which means they must join the euro, but only when they have fulfilled all preparation criteria. In other words, they cannot opt out of the euro as did some current EU member countries.

The second phase, the accession phase, started with the new states' EU accession in May 2004 and will last until they finally adopt the euro. The duration of this phase is, at this moment, difficult to predict, it could be at minimum two years or considerably more. In this phase, the exchange rate policies of the accession countries become the matter of common concern.

In the process of monetary integration of the accession countries, particular attention is devoted to ERM II, which can be described as a waiting room for the adoption of the Euro.
ERM II

ERM II is an interim exchange rate mechanism, devised for the accession countries (EU member countries which are not yet ready for joining the euro area). By participating in this interim exchange rate arrangement for at least two...

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