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LONG-RUN ECONOMIC ASPECTS OF THE EUROPEAN UNION’S EASTERN ENLARGEMENToften voiced fear that a country that ‘Euroises’ somehow ‘loses’ its money, is unfounded.Another more general point that emerges is that in analysing the financial implicationsof Euroisation one should avoid focusing too much on the stocks (of assetsand liabilities). The allocation of returns from these is more important. In otherwords, it is less important to see how many cows one will have in the stable than toknow from how many cows one actually gets the milk.Euroisation should be compared to the standard procedure for joining EMU, whichwill constitute the starting point of our analysis.2.1.1 STANDARD EMU ACCESSION PROCEDUREOn ‘Euro day’ the Estonian National Bank-Eesti Pank (EP) will hand over all theKroon cash and will receive the equivalent amount in Euro cash. Its balance sheetis not affected, but the profits and loss account will be by this move. From thatpoint onwards it will obtain about 0.3% of the earnings of the Eurosystem. Theshare 0.296 % is based on the capital key (which, in turn, is based on populationand GDP weights) 3 .178The base on which the Eurosystem earns its own so-called monetary income is theamount of Euro cash in circulation (around 360 billion Euro at present). Afterjoining the Eurosystem, EP will thus earn a monetary income of 0.296 % of 360billion Euro, or over 1,000 million Euro. The profits of EP should thus increase(because at present it earns only seigniorage on its national cash base of 400 millionEuro). How much Estonia gains will depend on the interest rates (the socalledreference rate, used to calculate the monetary income of the Eurosystem).Estonia will gain seigniorage revenues because its share in the overall monetaryincome of the Eurosystem is based on population weights. Estonia accounts foralmost 0.5 % of the (present) Euro area population, but only about 0.1 %(100×400/360.000 = 0,11%) of its monetary base (cash in circulation 4 ).How much could Estonia gain? Assuming that the reference rate (i.e. the interestrate used to calculate the monetary income in the Eurosystem) is 5 % the seignioragegain to Estonia from joining the Euro area would be:0.05× (360000×0.00296-400)=0.05× (1060 -400)˜30 million Euro, per annum.This is more than the total seigniorage income of EP at present. Joining the Euroarea would thus more than double the seigniorage income of Estonia. The gainwould amount to about 0.7 % of GDP. Other candidate countries could expect gainsof a similar size. 5Another implication of full membership in the Eurosystem is that EP will have to'transfer' (in reality only earmark) about 120 million Euro worth of dollars to the
ANNEXEScommon reserve pool of the Eurosystem (Estonia’s share of 50 billion Euro 6 ).EP will basically keep the returns on these dollars. This operation is thus mostly anaccounting procedure; it should have no impact on the profit and loss account.In sum, there will be no big impact on balance sheet, but a big gain on profit andloss account.2.1.1 EUROISATION (I.E. ADOPTION OF EURO CASH BEFORE ACCESSION TO EUROSYSTEM)Hypothesis 1: No help from EUStep 1 (early 2002): EP uses 400 of its reserves to buy Euro notes and coins fromcommercial banks (not the Eurosystem) in the Euro zone 7 . The balance sheet of EPwill shrink by this amount and it will earn less seigniorage (the loss will be equal tothe foregone interest on the 400 million, at interests of 5 % this would mean about20 million Euro p.a.).Step 2 (accession to EU (=2003?+2?): The day Estonia joins the Eurosystem as afull member it will hand over the old Kroon notes (which it should have keptsomewhere) and receives in return 400 million in Euros. It can then use theseEuros to re-constitute the reserves it had spent earlier under step 1. Its balancesheet will thus increase, but its profit and loss account will be affected in the wayoutlined above, i.e. Estonia gets from this day its share (0.3 %) of the monetaryincome of the Eurosystem and contributes only about 0.1 %.179The contribution to the common pool of foreign exchange reserves will also beneeded. But this has no financial implications, as outlined above.It is actually not important that ‘Estonia gets its money back’. Assume that EP doesnot keep the old Kroon cash, or that the Eurosystem refuses to exchange ‘old’Kroons against Euros. It would appear that in this case Estonia will lose the reservesit used initially to buy Euros. However, this is not the case. In case Estoniais not allowed to exchange its old Kroons into Euros, the balance sheet of the EPwill not increase upon accession to the Eurosystem. This would have one key implication:EP would not have to contribute to the overall monetary income of theEurosystem because its monetary base would be zero. (In accounting terms EPwould not have any liabilities under ‘notes in circulation’.) In this case EP wouldthus obtain each year the share of the monetary income of the Eurosystem calculatedabove (0.3 %), but it would contribute nothing. The lower contribution tothe Eurosystem would be exactly equal to the lower interest earnings on the reserves‘lost’.In conclusion, during the transition period (of unilateral Euroisation) Estonia willexperience a smaller balance sheet and be subjected to a loss of monetary income.The loss of seigniorage is transitory whether or not Estonia ‘gets its money back’.
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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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A SOUND AND DYNAMIC ECONOMIC UNION5
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A SOUND AND DYNAMIC ECONOMIC UNION
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EMU, EURO AND ENLARGEMENT6 EMU, THE
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EMU, EURO AND ENLARGEMENTTable 6.1
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EMU, EURO AND ENLARGEMENTDepositsDe
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EMU, EURO AND ENLARGEMENTEmployment
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EMU, EURO AND ENLARGEMENTwhich is s
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EMU, EURO AND ENLARGEMENT• The sa
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EMU, EURO AND ENLARGEMENTenues. Mea
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EMU, EURO AND ENLARGEMENTTable 6.6D
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EMU, EURO AND ENLARGEMENTDeposit mo
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EMU, EURO AND ENLARGEMENTBox 6.1The
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EMU, EURO AND ENLARGEMENTexchange r
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EMU, EURO AND ENLARGEMENTvariabilit
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Page 157 and 158: LITERATURELITERATUREAlberolo-Ila, E
Page 159 and 160: LITERATURECommission (1998i) Twenty
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Page 187 and 188: ANNEXESVariability of relative CPIM
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Page 205 and 206: ANNEXESreasons the Commission (1998
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