w 109 long-run economic aspects of the european union's eastern ...

LONG-RUN ECONOMIC ASPECTS OF THE EUROPEAN UNION’S EASTERN ENLARGEMENTNOTES1 It is interesting to note that the so-called Washington consensus is based onthe idea that free trade, sound fiscal policies and stable prices are good for anycountry, independently of its level of development and economic structure.However, while this approach is applied everywhere by the two Washingtoninstitutions, the IMF and the World Bank, it seems that some people do notconsider it valid for the candidate countries.2 Portugal does not have a coast on the Mediterranean Sea, but it is neverthelessusually counted as an honorary member of Club Med.3 A similar procedure is being adopted in the case of Greece: a EuropeanCouncil meeting in early 2000 will be based on data from 1999 and Greecewould then be able to join almost immediately.1344 A recent study prepared for the European Parliament provides a somewhatmore recent data set with provisional data for 1999.5 Although there are many definitions of Seigniorage, we define it here as thesavings in interest payments accrued to the government from the privilege ofissuing currency. See for details: Bini Smaghi and Gros (2000).6 Under such an arrangement, there is a fixed exchange rate peg to an anchorcurrency, automatic convertibility, a prohibition on domestic credit creationby the central bank and a long-term commitment to the system, often spelledout in the central bank law. Credibility is ensured by sufficient backing offoreign exchange reserves to cover all monetary liabilities, a sufficiently restrictivefiscal policy based on broad political support (to avoid speculativeattacks) and a healthy financial system or a readiness to let weak banks fail(European Parliament 2000). The CBA has a mechanism that automaticallyreacts to foreign exchange inflows and outflows through changes in the moneysupply which result in interest rate changes.7 Ecuador, a dream basket case, has recently started to implement a plan to fullydollarise its economy.8 We have assumed that enlargement is not delayed by intra-EU difficulties. If itwere, one would also have to address the question whether a modified preaccessionERM could be offered to those countries whose convergence record isvery good, (including capital market liberalisation), but whose formal EU membershiphave delayed for reasons outside their control (delay in ratification in EU).