The monetary framework after accession – a political economy analysis of ERM2

Article abstract:

The paper discusses the framework of ERM2 (the exchange rate mechanism of EMU, the Economic and Monetary Union) and its suitability for accession countries / advanced transition economies. It analyses the exchange rate mechanism from two aspects. First, it considers how ERM2 regulates the monetary cohabitation of 'ins' (Eurozone members) and 'outs' (non-Eurozone members of EMU). Second, it reviews how ERM2 is conducive to future euro-zone membership of the accession countries. From the first point of view it discusses whether ERM2 sufficiently protects 'outs' from speculative attacks, and 'ins' from competitive devaluation of the 'outs'. From the second angle it examines whether ERM2 provides an appropriate environment for 'outs' to fulfil the convergence criteria, and whether in this case 'ins' open the door for the 'outs' to enter the euro-zone. The principal argument of the paper is that the more ERM2 fulfils its first task, that is to regulate the relationship of 'ins' and 'outs' in a satisfactory way, the less it fulfils its second task, that is to lead 'outs' in the Eurozone. Apart from that, the present framework of ERM2 and the convergence criteria together are not suitable for a fast and quick entry of the Central and Eastern European accession countries to the euro area. In order to overcome these pitfalls the author makes some proposals as well.