Rules are important for economic development. But it is also important for rules to be appropriate and adequate for the respective situation. Furthermore, when the situation changes some modification to the rules become necessary. Societies that do not adapt to change are threatened to decline.
The so-called Maastricht criteria for countries applying for membership in the Euroarea are an example of rules that badly need to be changed. When the criteria were designed in the early 1990s the EU was twice smaller than now, while member countries had close income and price levels and rates of economic growth. These criteria, and especially the inflation criterion, are outdated and inappropriate to the present situation.
The EU of 25 countries (soon 27) is entirely different from 15 years ago. There are big differences in income and price levels which implies higher economic growth and inflation in new member states. Most of the lower income countries experience a catch-up process that is associated with higher economic growth and faster increase of wages and prices. This leads to either appreciation of the exchange rate (for floating exchange rate regimes) or higher inflation rates (for fixed exchange rate regimes). The situation is further complicated by the EU requirement for new member states to “harmonize” (i.e. increase) excise duties, which are strong pro-inflationary factor.
In a situation like this the only three ways for new member states to comply with the inflation (or exchange rate) criterion are to have stagnation of the economy or to use creative accounting and data beautification in order to manipulate the statistics (like Greece or Italy), or show open disregard for the rules (like Germany and France). Obviously, the most sensible solution is to scrap the Maastricht criteria or at least modify them to adapt to the change.
The experience of Bulgaria with the currency board (which resembles euroization) shows that euroization can be beneficial. It disciplines fiscal policy, leads to decreases of the budget deficit and stimulates economic reforms. Therefore, a fast adoption of the euro is highly desirable and must be pursued by the EU as a tool for promoting economic stability and reform in the new members.
The best move that can be made by the EU is to follow a “big bang” policy for enlargement of the euroarea. All new member states can be offered to enter immediately. There cannot be any negative implications – the combined GDP of the new member states is too small a portion of the GDP of the EU to change the monetary conditions. However, this move will be quite beneficial to new EU member states and will relieve them from the necessity to search for smart ways to circumvent the outdated criteria.
If a “big bang” policy is not implemented, the second best option for the new member states is to euroize unilaterally. If some of them do it the Commission and the ECB will be forced simply to recognize the fact.
Recommending “big bang” policy does not mean that the ECB is necessarily going to offer the best option for monetary policy in the long run. The ECB is not accountable and transparent. It does not even achieve its own goal for inflation - 77% of the time inflation is above the target. Therefore, the success of “big bang” policy is not unconditional. It requires ECB's monetary policy strategy to be improved (introducing explicit inflation targeting with symmetric inflation target set by political authority – for example ECOFIN) and its transparency and democratic accountability to be strengthened. If these improvements are not made, the euro might loose its credibility and strength and many countries might be better advised never to join the Eurozone.
* A shorter version of this article appeared for the first time on January 19, 2006 in the Brussels newspaper “European Voice”, published by “The Economist”.
** Georgi Angelov is senior economist at the Institute for Market Economics, Sofia. As deputy chairman of the Bulgarian National Bank in the 1990s, Martin Zaimov oversaw the introduction of a currency board.