Euro adoption: views from the third row
- PDF / 166,804 Bytes
- 18 Pages / 442 x 663 pts Page_size
- 110 Downloads / 231 Views
www.palgrave-journals.com/ces
Euro adoption: views from the third row BORIS VUJCˇIC´1 Croatian National Bank, Trg hrvatskih velikana 3, 10000 Zagreb, Croatia. E-mail: [email protected] Croatia is already much more euroised than any of the first wave accession countries. The paper demonstrates that Croatia has a strong incentive to adopt euro as soon as it becomes feasible. Costs of doing so are smaller because the degrees of freedom for an independent monetary policy-making are already reduced, while the benefits are higher. A special benefit that a heavily euroised economy derives from formally adopting the euro is removal of relatively high costs of prudential regulation connected to the balance sheet risk and a possible run on the foreign exchange liabilities of the banking system. This would in turn substantially reduce costs of financial intermediation and interest rate spreads. Our analysis suggests that in a highly euroised economy, the costs of euro adoption are smaller and the benefits are larger than in a non-euroised economy. Comparative Economic Studies (2004) 46, 159–176. doi:10.1057/palgrave.ces.8100042
Keywords: euroisation, balance sheet risk, prudential regulation, Croatia JEL Classifications: E52, E58, F31, P52
INTRODUCTION Croatia has made an application and aims to join the EU in the second wave of enlargement in 2007. Therefore, Croatia is in the third row as far as euro adoption is concerned, after the eurozone countries and three non-eurozone countries of the EU and the first-wave candidate countries, which will join the EU in 2004. Croatia differs from the first-wave accession countries in at least two important ways. First, it will have the opportunity to introduce the euro later, at the end of this decade at the earliest. Second, Croatia is already much more 1
I would like, without implication, to thank Istvan Szekely and Jeff Miller for helpful suggestions. The views expressed in this paper are mine and do not represent the official position of the Croatian National Bank.
B Vujcˇic´ Euro adoption: Croatia
160
euroised than any of the first-wave accession countries. This paper will demonstrate that Croatia, as a highly euroised economy, has a strong incentive to adopt euro as soon as it becomes feasible. Costs of doing so are smaller because the degrees of freedom for an independent monetary policymaking are already reduced, while the benefits are higher. A special benefit that a heavily euroised economy derives from formally adopting the euro is removal of relatively high costs of prudential regulation connected to balance sheet risk and a possible run on the foreign exchange liabilities of the banking system. The paper is organised as follows. First, we describe the extent of de facto euroisation of the Croatian economy. Then, we discuss its implications for the financial stability and monetary policy. We describe constraints it puts on the policy-makers and need for tight regulatory standards due to high balance sheet risks. In the fifth part, we look at the incentives to adopt
Data Loading...
