Profiting from the euro? Seigniorage gains from euro area accession

Abstract:

This article puts forward a methodology to assess the fiscal implications for the new EU members from central and eastern Europe (CEECs) of joining the euro area. An application of this methodology under a specific set of conditions shows that the rules of the ECB on the distribution of seigniorage favour poorer countries so that one would expect the new member countries to benefit from participating in the distribution of the profits of the ECB. For two countries the gains could indeed be sizeable, initially almost 1 per cent of GDP, per annum. But for others the gains are more modest. Two factors have tended to reduce the expected financial gains for the new Member States: firstly, since the introduction of the euro, cash use has fallen considerably in the euro area; and secondly, some of the new CEEC members have in general much higher cash-to-GDP ratios and therefore earn, for the time being, relatively high domestic seigniorage revenues. Illustrative calculations show that, in present value terms, the gains could reach up to 10 per cent of GDP for poorer countries that catch up only slowly to the EU average. But countries that enter with a GDP per capita above about one-half of the EU average might actually lose if initially their cash ratios are much above the euro area value.