Adopting the Euro: a path to fiscal sustainability

Győrffy, Dóra (2005) Adopting the Euro: a path to fiscal sustainability. Acta Oeconomica, 55 (2). pp. 151-170. ISSN 0001-6373

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Abstract

Following their accession to the European Union, new member states are now facing the next step in the integration process: the adoption of the common currency. While there is a relative agreement about the overall benefits of joining the European Monetary Union (EMU), the timing of entry has been subject to significant controversy. A gradual path of accession is often suggested since the contractionary effects of fulfilling the fiscal criterion of the Maastricht Treaty might contradict the objective of real convergence. The author argues against this position by showing that even without EMU entry it is the self-interest of the new member states to pursue policies in accordance with its rules, considerations of competitiveness make the usual options of financing further deficits (inflation, accumulation of debt, or increasing taxes) very costly in terms of long-term growth prospects. Slovenia and the Baltic countries have already recognised this and have achieved a virtuous circle of low deficit, low debt and high growth rates. In contrast, the Visegrád countries are struggling with the fiscal criteria. In their case accession into the euro-zone opens a window of opportunity to introduce reforms, which are conducive to the long-term sustainability of their finances.

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