Spotlight falls on countries bidding to join EU

Date: 18/11/1999

By Tim Jones

ENLARGEMENT of the EU must be a serious prospect if the European System of Central Banks is sticking its oar into the negotiations.

"It seems natural that the Eurosystem will become more and more involved in this process in the near future, particularly given the implications of enlargement for our main tasks and objectives," said ECB President Wim Duisenberg in his first keynote speech on the subject.

"If the challenge of EU enlargement and the subsequent enlargement of the euro area is to be successfully met, it is essential that we are prepared for it when the time comes."

This is especially urgent since, unlike the British and Danish governments, the central and eastern European countries (CEECs) bidding for EU membership will not be offered the chance to opt out of economic and monetary union.

Once they join the Union, they will be treaty-bound to go hell-bent for EMU and their monetary policies, exchange rate regimes and payment systems will suddenly become frighteningly important to the Eurosystem.

The bank's staff are already putting the applicants' policies and financial systems under the microscope. It is no accident then that CEEC central bankers descended upon Frankfurt last week to hold bilateral talks at the Eurotower in preparation for a three-day pan-European central bankers' summit in Helsinki next month.

For now, the ECB is most keen to encourage the creation of what it calls "deep and liquid capital markets"; an achievement which some euro-zone countries have yet to manage.

This means that Frankfurt will be encouraging the CEEC authorities to ensure a wide variety of debt instruments for big-time investors to choose and, above all, the 'liquidity' which allows these securities to be bought and sold quickly. Without this, CEEC money markets would be unable to cope with the demands of the gigantic Eurosystem wholesale market.

The area which causes several council members most disquiet is exchange rate policy. The bank's research department is already looking into the regimes adopted by various CEECs, ranging from the straightforward pegging of currencies to the euro and dollar to pre-announced 'crawling' devaluations and free-floating.

The 1993 meltdown of the Union's old Exchange Rate Mechanism, which forced all member currencies to trade within a given band against every other currency, confirmed many of the northern central bankers' fears about semi-fixed exchange rate regimes.

This view found support in a recent study published by the Centre for Economic Policy Research in which monetary economists David Begg, Charles Wyplosz and László Halpern argue that ERM II is "neither necessary nor sufficient for delivery of the most appropriate form of external conditionality."

It only sets a target for the exchange rate and, say the report's authors, the CEECs need incentives to ensure their fiscal responsibility, bring about true central bank independence, invest in infrastructure, introduce tax reform and police nascent financial markets.

The report calls for the kind of EU surveillance on the applicants which was practised on the EMU candidate countries. Beefing up the 'joint assessments' carried out by the European Commission and applicants could come close to addressing this concern.

These medium-term plans, which look suspiciously like the 'convergence programmes' submitted by EMU 'outs', have taken on extra weight with the recent Czech assessment. This set tough goals for Prague - average growth of 2.1% between 2000-2002, a decline in the budget deficit below 3% from 2001 and current account balance a year later - in return for the Commission's stamp of approval on the programme.

Enlargement of the EU must be a serious prospect if the European System of Central Banks is sticking its oar into the negotiations.