Take the Euro and Run

For the eight post-communist countries that the EU promises to admit in 2004, joining its Economic and Monetary Union (EMU) poses an accompanying obligation. Unlike the United Kingdom or Denmark, the new members cannot opt out of the euro. They can only control when to adopt it, which in principle could be as early as two years after EU admission.

Obviously, accepting the Maastricht Treaty, with its tough constraints on fiscal, monetary, and wage policies, is far more than an economic decision. But in the final analysis, the conviction--or lack of it--that joining EMU will bring powerful economic benefits is the force likely to guide decisions about whether to embrace the euro as soon as possible.

EMU is founded on the idea, pioneered by the Nobel laureate Robert Mundell, that the costs and benefits of monetary integration depend on whether or not countries share certain properties. A group of countries characterized by economic openness, trade and financial market integration, similar economic structures, price and wage flexibility, labor mobility and other factors of production may, according to this view, form an optimum currency area (OCA).

Do the post-communist candidate countries share the OCA properties required for successful EMU membership? Their degree of economic openness, measured by the share of exports and imports in their GDP, is as high as that of current EMU members. This is vital, because the more open an economy, the more the prices of internationally traded goods determine domestic inflation, thus making an independent exchange rate policy less necessary for influencing relative prices and competitiveness.