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LONG-RUN ECONOMIC ASPECTS OF THE EUROPEAN UNION’S EASTERN ENLARGEMENTthere is no real difference in the macro-economic performance of the two groups,as measured by the Maastricht criteria.The data thus clearly suggest that the candidate countries likely to join the EU firstare already much closer to satisfying the Maastricht criteria than the Southernmember states of the EU were in the early 1990s. Moreover, experience has repeatedlyshown that a short and sharp adjustment is politically and economically lesspainful than a protracted, and hence supposedly soft one. The case of Greece,which was until recently regarded as a lost cause, provides a further illustration ofthis. The relatively small fiscal adjustment that is still required of the candidatescould thus come rather quickly. It is also likely to be politically much easier to implementthan the slow adjustment of some established member countries. Thus,the ‘strikes against Maastricht’ that occurred in France, are highly unlikely to takeplace in any of the candidate countries.This relatively good starting position of the candidate countries obviously does notmean that there will be no problems with the Maastricht criteria. However, as willbe shown below in a systematic discussion of these criteria, such problems may beof a different nature from what is widely expected. In this respect, we will emphasisethe importance of political will and the likely problems with the inflationcriterion.1106.4.1 THE DEFICIT CRITERIONAchieving a fiscal deficit below three per cent is essentially a question of politicalwill. Most of the candidates already satisfy this norm, and none of them has structuralproblems that would constitute an in-surmountable obstacle. However, onecan highlight certain features of their public finances that will make this achievementharder. These are, among other factors, their pension systems, the ageprofile of their populations, participation rates and also the structure of their fiscalrevenues (since enlargement will affect some revenues, for example through theneed to adjust VAT rates). Some revenues (e.g. inflation tax and customs duties)should almost disappear already before enlargement.Preliminary indications suggest that the importance of the inflation tax is muchover-estimated. Many estimates of the potential inflation tax in the CEECs arrive atfigures of about two to three per cent of GDP. This is based on simple arithmetic: acash to GDP ratio of between five and ten per cent, combined with nominal GDPgrowth rates of twenty up to 30 per cent (allowing for five per cent real growth andan inflation rate of between fifteen and 25 per cent). This set of figures is not farremoved from the recent experience of several CEECs (see Hochreiter and Rovelli1999). However, most of them have reduced inflation much below the figuresmentioned above, because they are aware of the overall benefits from price stabilityand of the other, less visible, negative effects of inflation on public sector rev-
EMU, EURO AND ENLARGEMENTenues. Measured seigniorage 5 is thus never a good guide to the impact of inflationon public sector revenues (the so-called Olivera-Tanzi effect).It appears, moreover, that over the last several years countries like Poland and theCzech Republic have actually had almost no seigniorage income at all because theircentral banks had to offset interest income against the losses on huge sterilisationoperations. A more systematic investigation of this would require a closer look atthe profit and loss accounts of all central banks. This is outside the scope of thischapter. (Central bank accounting for profits and losses is notoriously opaque, seechapter 3 of Bini-Smaghi and Gros 2000). However, the result for two of thelargest CEECs indicates that the importance of seigniorage has been much overblown.Even if the CEECs current performance in terms of public finances would not provepermanent, there is no reason to assume that any problems could not be redressedquickly. Firstly, the experience of Italy, Spain and Portugal has shown that oncethe political will to achieve fiscal convergence becomes apparent and strong initialsteps are taken, a virtuous circle can be set into motion whereby financial marketsstart to anticipate a probability that the country in question will succeed. Thisleads to lower interest rates, which make it easier to achieve lower deficits andthus in turn validate even stronger expectations of success. This is why reductionsof fiscal deficits of up to four per cent of GDP became possible within a short periodof time (say one to two years) once the political decision was taken. Secondly, oneshould not under-estimate the extent to which the fiscal criteria will influencepolicies in candidate countries even long before entry.111Correcting a fiscal deficit within a couple of years ‘merely’ requires a determinedFinance Minister with solid backing in Parliament. By contrast, implementing allthe internal market measures requires an administrative infrastructure that cannotbe built up in such a short period of time. Training tens of thousands of civilservants and organising them in complex structures to apply a maze of complicatednew laws and regulations is a task for a decade, or more. In this sense wewould argue that satisfying the deficit criterion is a relatively straightforward task.Infrastructural needsIt is sometimes suggested that the Maastricht criteria are not appropriate for thecandidates, because they need to invest more in infrastructure and may need toincur deficits on this account. This argument is based on assumptions that arequestionable: that the infrastructure of the candidates is inadequate, that moreinfrastructure investment will increase growth and that this investment has to befinanced by the government.The public infrastructure of the candidates is certainly less developed than that ofcurrent EU members. The candidates have fewer motorways and paved roads perinhabitant and per square kilometre, fewer fixed telephone lines, etc. However,
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WORKING DOCUMENTS W 109LONG-RUN ECO
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CONTENTSCONTENTSPreface 3Summary 91
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CONTENTSAnnexes1 The Balassa-Samuel
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LONG-RUN ECONOMIC ASPECTS OF THE EU
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INTRODUCTION1 INTRODUCTIONThe Europ
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INTRODUCTION4 To what extent do the
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INTRODUCTIONefficiency-based (first
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INTRODUCTIONThe exercise is not so
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INTRODUCTIONsome suggestions to min
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PROBLEMS OF ACCESSION TO THE INTERN
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Page 105 and 106: EMU, EURO AND ENLARGEMENTEmployment
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Page 157 and 158: LITERATURELITERATUREAlberolo-Ila, E
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LITERATURETornell, A. and A. Velasc
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ANNEXESANNEX 2WHY IT PAYS TO JOIN T
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ANNEXESThe key item in equation (4)
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ANNEXEScommon reserve pool of the E
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ANNEXESThe day Estonia joins EMU th
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ANNEXESANNEX 3THE VARIABILITY OF TH
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ANNEXESTable A4Correlation coeffici
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ANNEXESVariability of relative CPIM
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ANNEXESANNEX 4AVERAGE FARM NET VALU
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ANNEXESANNEX 5EU BUDGET 1997 COMPAR
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ANNEXESTable A10Estimated expenditu
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ANNEXESANNEX 6 EFFECTS OF THE BERLI
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ANNEXESTable A17Estimated expenditu
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ANNEXESANNEX 8TECHNICAL ASPECTS AND
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ANNEXESreasons the Commission (1998
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ANNEXESOwn resourcesThe amount reta
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