Assessing Central and Eastern European Countries’ Viability of Euro Adoption According to the Theory of Optimum Currency Areas

7 Opening Remarks Question: Are the ten new EU members from central and eastern Europe appropriate and ready for adopting the euro? . Answer: Let us take as benchm ark the theory of optimum currency areas in order to gauge that! The successful accession to m embership in the European Union (EU) by the economies from the Central and Eastern Europe Countries (CEECs) in 2004 and 2007 threw up a main challenge: the introduction of the euro as their national currency. The eastward expansion of the euro area is an unavoidable issue since the CEECs will not be able to stay outside the European Monetary Union (EMU)1 as has been the case with the several countries of Western and Northern Europe (i.e. Denmark and the United Kingdom). Nevertheless, entry into the EU does not guarantee immediate acceptance into the monetary union because the CEECs have to join the Exchange Rate Mechanism and, eventually at least two years after their participation, comply with the Maastricht criteria. This work aims at checking the CEECs fulfillment not only of the nominal (fiscal and financial) criteria set forth in the Maastricht convergence parameters but also of the real and structural requirements requested by the Optimum Currency Area (OCA) test. Thus for answering the question of the suitability of the CEECs for a single currency, the OCA theory offers several assessment criteria. The fundamental assumption underlying the OCA theory is the following: what are the main costs and benefits of giving up the exchange rate tool when two or more countries decide to constitute a monetary union? The OCA theory has identified the conditions under which a monetary union between countries (in our case, the present euro area members and the CEECs) work smoothly. When countries are hit by different disturbances (asymmetric shocks), the adjustment process requires that real exchange rates adjust. Since countries forming a monetary union decide to fix their real exchange rates, in the absence of real exchange rate adjustability, there 1 It was one of the EU-accession criteria specified in the 1993 Copenhagen Council which explicitly stated that new EU members will have to ... take on the obligations o f membership, including (...) the Economic and Monetary Union meaning that no opt-out provision exists for the CEECs.