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Policy Contribution

With or without you: are central European countries ready for the euro?

The debate on euro adoption by central European EU countries has intensified in the last years. In this Policy Contribution the author does not review all the complex aspects of euro-area enlargement, but analyse a particularly important issue: the build-up of macroeconomic vulnerabilities and the subsequent adjustments.

By: Date: October 10, 2019 Topic: European Macroeconomics & Governance

Southern European euro-area members suffered from unsustainable developments after they joined the euro in 1999 and up to 2008, and have had great difficulties since. Inadequate national policies were the main causes of these unsustainable developments, but euro membership played a role before 2008 by leading to low real interest rates (which fuelled credit booms) and by enabling complacency about potential vulnerabilities. Euro-area crisis management was also deficient in a number of ways.

Of the 13 countries that joined the EU between 2004 and 2013, seven have entered the euro area. Many faced similar problems to southern Europe in the pre-crisis period when they had fixed exchange rates, but they were able to adjust inside the euro area and resume economic convergence. Slovakia, which joined the euro area at a very strong exchange rate in 2009, and Bulgaria, which has a currency board fixed to the euro, performed similarly or even better in macroeconomic terms than the Czech Republic, Hungary and Romania between 2008 and 2019, even though the exchange rates of those three countries depreciated significantly after 2008. Two floating-rate countries, Hungary and Romania, had to apply for financial assistance after 2008. Croatia had many difficult years under a tightly managed exchange rate, but was eventually able to adjust and return to economic convergence. There were thus good and bad macroeconomic performances in both flexible and fixed exchange-rate regime countries. Euro-area membership (or the use of a fixed exchange rate) has not been a factor determining economic success in central Europe.

The level of economic development is not significant for the euro-entry decision. Countries at lower development levels will likely face higher inflation and thereby a lower real interest rate, potentially generating booms. But globally low interest rates have already pushed the real interest rates in floating exchange rate central European countries to lower levels than those in southern European countries when they entered the euro. Moreover, the central European countries that have already entered the euro area have coped with this problem.

The focus for euro adopters should be the prevention of macroeconomic and financial vulnerabilities and the capacity to address such imbalances if they occur. Macroprudential policy and sustainable fiscal policy are crucial to prevention, while flexible labour and product markets help in any adjustment. Banking union membership prior to euro membership could reduce the potential for financial and macroeconomic vulnerabilities. High quality policymaking is essential, since market signals might be muted inside the euro area.

Current central European euro non-members can be economically successful both with and without the euro. Nevertheless, the legal commitment to join the euro must be honoured, a step that should also strengthen members’ commitment to European values.

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External Publication

EU-India trade relations: assessment and perspectives

In-depth analysis prepared for the European Parliament's Committee on International Trade (INTA).

By: Suman Bery, Sonali Chowdhry, Alicia García-Herrero and Niclas Poitiers Topic: Global Economics & Governance Date: September 10, 2021
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Policy Contribution

A green fiscal pact: climate investment in times of budget consolidation

Increasing green public investment while consolidating deficits will be a central challenge of this decade. A green fiscal pact would address this tension, but difficult trade-offs remain.

By: Zsolt Darvas and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 9, 2021
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Past Event

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Conference on the Future of Europe: envisioning EU citizens engagement

Bruegel Annual Meetings, Day 3 - Panellists will discuss different options and what they may entail while revisiting the debates on the future of Europe at national and EU-level that have been conducted thus far.

Speakers: Caroline de Gruyter, Kalypso Nicolaïdis, Niclas Poitiers and György Szapáry Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1 Date: September 3, 2021
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Blog Post

Will European Union recovery spending be enough to fill digital investment gaps?

The recovery facility will boost digital transformation, but questions remain whether it will be sufficient to achieve Europe’s digital ambitions.

By: Zsolt Darvas, J. Scott Marcus and Alkiviadis Tzaras Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 20, 2021
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Opinion

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Europe has already made a significant financial contribution to beating the pandemic, now it has the opportunity and moral responsibility to do more.

By: Anne Bucher and Guntram B. Wolff Topic: Global Economics & Governance Date: July 19, 2021
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Policy Contribution

A new direction for the European Union’s half-hearted semiconductor strategy

The EU needs a more targeted strategy to increase its presence in this strategic and thriving sector, building on its existing strengths, while accommodating its relatively low domestic needs.

By: Niclas Poitiers and Pauline Weil Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 15, 2021
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Blog Post

A breakdown of EU countries’ post-pandemic green spending plans

An analysis of European Union countries’ recovery plans shows widely differing green spending priorities.

By: Klaas Lenaerts and Simone Tagliapietra Topic: European Macroeconomics & Governance Date: July 8, 2021
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Past Event

Past Event

Investment firepower for the recovery: a conversation with Philippe Donnet, CEO of Assicurazioni Generali

At this event the CEO of Assicurazioni Generali, Philippe Donnet will be in conversation with Guntram Wolff, Director of Bruegel.

Speakers: Philippe Donnet and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: July 8, 2021
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Blog Post

How have the European Central Bank’s negative rates been passed on?

Negative rate cuts are not that different from ‘standard’ rate cuts. Like them, they reduce banks’ margins, but this effect does not appear to be amplified below 0%.

By: Grégory Claeys and Lionel Guetta-Jeanrenaud Topic: European Macroeconomics & Governance Date: July 7, 2021
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Past Event

Past Event

Conference on the Future of Europe: Vehicle for reform versus forum for reflection?

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Speakers: Sergio Fabbrini, John Erik Fossum, Magdalena Góra, Vivien Schmidt, Manfred Weber and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 16, 2021
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Blog Post

The Conference on the Future of Europe: vehicle for reform versus forum for reflection?

The approach of the European Union’s institutions to the Conference on the Future of Europe is muddled, with risks for the outcome.

By: Sergio Fabbrini, John Erik Fossum, Magdalena Góra and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 15, 2021
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External Publication

The Value of Money, Controversial Economic Cultures in Europe: Italy and Germany

A discussion of Italian and German macro-economic cultures and performances.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: June 10, 2021
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