Endnotes

¹European Commission (2008).

²Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.

³See, for instance, Buti and Sapir (1998) and (2002) for a good overview. See Jonung and Drea (2009) for a survey of the positions taken by US economists toward the euro before its launch.

⁴This last point refers to the so-called “Walters critique.” See Walters (1986).

⁵See also Eichengreen (2008).

⁶See European Commission (2008, 117–132) and Papaioannou and Portes (2008).

⁷A broad consensus regarding the main causes of the global financial crisis has emerged. Detailed descriptions of the causes of the crisis can be found, for instance, in de Larosière et al. (2009), Issing et al. (2009), European Commission (2009a), and Financial Stability Forum (2008), on which this subsection draws.

⁸See also the text box on the EU response to the economic and financial crisis. Euro-area policy developments throughout the crisis are described in more detail in European Commission (2009a).

⁹See the special report on competitiveness developments within the euro area, in European Commission (2009f).

¹⁰European Commission (2009d).

¹¹See de Larosière et al. (2009).

¹²Commission Communication on European Financial Supervision of 27 May (COM 2009).

¹³Longstaff et al. (2007) find that a large percentage of the variation in sovereign credit risk is driven by global factors and do not relate to country-specific credit risk.

¹⁴Moreover, differences in spreads cannot be ascribed to the low integration of bond markets, as euro-area bond markets are well integrated (e.g., Schulz and Wolff 2008).

¹⁵Jonung and Drea (2009) review the position of US economists regarding the prospects of the euro in 1989–2002 and find that many were highly skeptical. The authors summarize their findings with a quote from Rudiger Dornbusch: “The euro: it can't happen. It is a bad idea. It won't last.” Feldstein (1997) was also among the early skeptics.

¹⁶See Jones (2009).

¹⁷For more details, see European Commission (2009f).

¹⁸According to Eurobarometer 71 of September 2009 (European Commission 2009c), with the exception of Austria (41%) and Greece (45%), the acceptance among euro-area member states of EU membership being a “good thing” ranges rather unchanged over the years, from around 50% to about 70%.

¹⁹This section does not address the issue of euro adoption by Denmark, Sweden, and the UK, because in these countries there is a strong political element to the issue, and because the analysis focuses primarily on the challenges for converging economies and on the issue of managing a more heterogeneous euro area.

²⁰The NMS started their transition from subpar trade integration and with a largely undeveloped financial sector. For a discussion of trade patterns during and after transition see Fabrizio, Igan, and Mody (2007).

²¹The underlying drivers of foreign-currency borrowing are diverse; exchange rate regimes play a role but their impact may be somewhat less straightforward than might be assumed. To be sure, euro-denominated borrowing has been predominant among the peggers (particularly in the Baltics; somewhat less in Bulgaria), as exchange rate risk was perceived to be close to zero and hence even small interest rate differentials were exploited. In some cases an accommodative regulatory framework (e.g., with no limits on banks' open euro positions) has contributed. What may be somewhat more surprising is that also in some of the “floaters” forex borrowing has increased significantly, accounting for half of the total credit, and more in some instances. In this case, high interest rate differentials appear to have played the main role.

²²The size of the so-called “halo effect” of EU membership on external financing conditions has been estimated by Luengnaruemitchai and Schadler (2007) to be around 50–100 basis points. During the crisis, this effect appears to have largely unwound (IMF 2009), amplifying the widening of spreads in a pro-cyclical manner.

²³For an overview of the drivers of real appreciation in the NMS see European Commission (2008) and Égert (2007).

²⁴It goes without saying that in some countries the reining in of fiscal deficits is not only an issue because of the convergence criteria, but rather, or even primarily, an imperative in view of limited fiscal space and the need to limit financing needs.

²⁵The aggregate picture masks country-specific diversity. While the Baltics (notably Estonia) tend to score relatively well in international rankings on competitiveness and the business environment (see, for example, World Bank [2008]), Bulgaria tends to lag behind, in particular regarding the institutional framework.

²⁶This follows Calvo and Reinhardt (2002) on the “fear of floating.”

²⁷In this context, Szapáry (2009) shows that the euro has increasingly become an anchor also for the floating NMS.

²⁸See, for example, Darvas and Szapáry (2008).

²⁹ERM II was established at the start of 1999 to provide a framework that would foster exchange rate stability and convergence in Member States outside the euro area. Participation is voluntary but expected at some point after EU accession. The mechanism provides for mutually agreed central rates to the euro and standard fluctuation bands of ±15%. Intervention at the margin of the band is in principle automatic and unlimited, unless it conflicts with the objective of price stability. All decisions in ERM II (entry, central rates, fluctuation bands, realignments) are taken by consensus of all participants. Current non-euro-area participants are Denmark and the three Baltics.

³⁰Council of the European Union (2000, 2003).

³¹Around 37% of the NMS total is accounted for by Poland and another 26% by the Czech Republic and Hungary, while the recently acceded four new entrants into the euro area account for only 13%. Euro-area enlargement would thus primarily affect the euro-area aggregate through developments in these countries.

³²For a discussion see, for example, European Commission (2009e).

³³See Blanchard and Giavazzi (2002).

³⁴See Eichengreen (2008) for the euro area's unique structure.

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