Accessibility links

Breaking News

East/Central Europe: Benefits To Be Reaped From Monetary Union

Washington, 5 October 1998 (RFE/RL) -- The introduction of full monetary union in Europe in January could, according to a new IMF study, shift significant amounts of international portfolio investment into the countries of Central and Eastern Europe.

The study, released in Washington, indicates that undetermined amounts of the investment now going into the southern countries of the European Union (EU) -- principally Spain, Portugal and Greece -- will probably shift especially to the Czech Republic, Hungary, Poland, and Slovenia as a way for global investors to maintain diversified portfolios.

The chief of the surveillance policy division of the International Monetary Fund, Roger Nord, who directed the study, says it is the first to focus on the impact of EMU on non-EU countries.

Overall, he told a press conference in Washington Sunday, the study shows that the impact of EMU will be the greatest in the nations of Central and Eastern Europe.

Taken as a group, he said, IMF figures show that for each one percent growth in the Euro area's GDP (gross domestic product), the countries of Central and East Europe can expect to see their GDP grow by 0.6 percent and their exports to rise by 1.5 percent.

For the study, the IMF included 13 countries in the region -- Albania, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Poland, Romania, Slovakia, and Slovenia.

By comparison, the study shows, Mediterranean basin countries -- Algeria, Cyprus, Egypt, Israel, Jordan, Lebanon, Libya, Malta, Morocco, Syria, Tunisia, and Turkey -- can expect to have their GDP benefit by half that -- 0.3 percent for each 1 percent rise of EU economic growth. Their exports would rise by 1 percent for each percent of increase in EU GDP.

Countries with especially heavy manufactured exports to the EU, such as the Czech Republic whose exports to the EU amount to around 30 percent of GDP, would be affected even more than the average.

Nord says the impact of EMU will be across a broad range of life for the union's nearest neighbors, from the level of interest rates to labor policies. There is apt to be a "significant impact on the economic structure of these countries as well," says Nord, especially for those nation's seeking to join the EU.

But in all cases, he says, the creation of the single market and currency in the EU will create even greater competitive pressures in all its neighboring countries, pressures that will force them to converge their own laws and policies toward those of the union.

As in all such studies, the IMF's conclusions are based on the middle ground of economic assumptions: general continued economic convergence and reform within the EU and continued reform in the Central and East European nations.

But if the EU suffered from what is called "reform fatigue" -- meaning if planned EU structural reforms lagged, unemployment remained high and government spending drifted higher -- then the expected impact on the Central and East European countries would be a 0.6 percent reduction in GDP and a cut in exports of just under 1 percent.

The authors note that in their EU reform fatigue scenario, it would also be possible that if the countries of Central and East Europe stayed on the reform path, they could actually be the beneficiary of investment from firms seeking to avoid the EU's persistent labor market rigidities.

But they concede, that scenario is impossible to anticipate, so was not included in the study's calculations.

Full European Monetary Union comes into effect on January 1 with the introduction of the single Euro currency. In the long run, says Nord, a successful EMU will be beneficial for the entire world, and especially Central and Eastern Europe.