In 2004 ten new member states joined the European Union. Today three of these member states have already joined the euro area. The remaining seven member states all intend to introduce the euro in the near future. This thesis examines whether these new member states and the euro area will constitute a so called Optimum Currency Area, OCA. According to the OCA-theory the countries in an OCA should have a high diversified export, high trade relations with each other, high mobility in the factors of production and profound political integration. The new member states’ trade relations with the euro area have been growing, but at the same time, the countries’ export diversification has been decreasing. This is due to the dominance of intra-industry trade between the countries. The EMU itself has contributed to increase the trade between the countries due to the endogeneity of the EMU. The political integration can be said to be fulfilled, but that is certainly not true for the mobility of production factors - labour and capital. New regulations and initiatives have improved the labour mobility within EU, but many countries do still impose regulations on labour mobility. The capital mobility within EU has improved, but differences in taxation are in practice an obstacle to complete capital mobility. It is therefore the conclusion of this thesis that the euro area and the new member states at present do not constitute an optimum currency area. Since the membership of EU economic convergence has taken place in the new member states - although the member states have shown huge differences in meeting the Maastricht criteria. A member state must fulfil the criteria before it can abolish its local currency and introduce the euro. There is a possibility that the ongoing financial crisis can force the countries to postpone the introduction of the euro. The euro was introduced when the European countries experienced an economic boom and as yet the euro countries have not experienced an economic recession. Therefore the euro has not been put to a final test. Many economists are worried that the euro countries during a recession will use their fiscal policy to their own benefit, which may not benefit the euro area as a whole. The International Monetary Fund has noted that many of the new member states are experiencing huge deficits on the Balance of Payments and they are dependent on foreign capital to finance these deficits. If the financial crisis turns worse there is a possibility that the stream of capital might stop due to increasing risk aversion. This could postpone the member states introduction of the euro. The crisis could further increase the tensions in the existing euro area countries thereby making it less attractive to join the euro area.
|Educations||MSc in Finance and Accounting, (Graduate Programme) Final Thesis|
|Number of pages||85|