4. The Euro Area Enlargement

2 The Euro Area Enlargement The new Member States are large in population but are small in economic terms 2003 Population (millions) GDP (billion euros) New Member States EMU (24%)6828 (6%) EU (19%)8843 (5%)

3 The Euro Area Enlargement Basic Statistics

4 The Euro Area Enlargement EU10 Country Profiles

5 The Euro Area Enlargement EU10 Country Profiles

6 The Euro Area Enlargement EU10 Country Profiles

7 The Euro Area Enlargement Nominal versus real convergence High divergence of real GDP per capita and of price levels Economic catch up leads to (Balassa – Samuelson effect) –high inflation OR –nominal appreciation of the currency Real GDP Gap: Economic Convergence Theory by Robert Solow

8 The Euro Area Enlargement

9 Unemployment Rates

10 The Euro Area Enlargement Inflation rates : Because of catch up growth, inflation rates in EU10 countries higher than in EU15

11 The Euro Area Enlargement Inflation rates

12 The Euro Area Enlargement Long-Term Interest Rates

13 The Euro Area Enlargement Long-Term Interest Rates

14 The Euro Area Enlargement Nominal versus fiscal convergence Central bank independence and convergence of inflation are prerequisites for joining EMU These increase the burden for government budgets. Budget deficits in many new Member States have increased a lot.

15 The Euro Area Enlargement Government Deficit to GDP Ratio

16 The Euro Area Enlargement Government Deficit to GDP Ratio

17 The Euro Area Enlargement Government Debt to GDP Ratio

18 The Euro Area Enlargement Government Debt to GDP Ratio

19 The Euro Area Enlargement Government Deficit and Government Debt to GDP Ratio

20 The Euro Area Enlargement Exchange Rate Stability

21 The Euro Area Enlargement Exchange Rate Stability: ERM II Denmark: the Danish kroner joined the Exchange Rate Mechanism II (ERM II) on 1 January 1999 and observes a central rate of and narrow fluctuation margins (±2.25%) vis-à-vis the euro. Estonia: the Estonian kroon joined the Exchange Rate Mechanism II (ERM II) on 28 June 2004 and observes a central rate of and standard fluctuation margins (±15%) vis-à-vis the euro. Estonia unilaterally maintains a euro-based currency board. Cyprus: the Cyprus pound joined the Exchange Rate Mechanism II (ERM II) on 2 May 2005 and observes a central rate of and standard fluctuation margins (±15%) vis-à-vis the euro. Latvia: the Latvian lats joined the Exchange Rate Mechanism II (ERM II) on 2 May 2005 and observes a central rate of and standard fluctuation margins (±15%) vis-à-vis the euro. Latvia unilaterally maintains the exchange rate of the lats within a 1% fluctuation band around its central rate vis-à-vis the euro.

22 The Euro Area Enlargement Exchange Rate Stability: ERM II Lithuania: the Lithuanian litas joined the Exchange Rate Mechanism II (ERM II) on 28 June 2004 and observes a central rate of and standard fluctuation margins (±15%) vis-à-vis the euro. Lithuania unilaterally maintains a euro-based currency board. Malta: the Maltese lira joined the Exchange Rate Mechanism II (ERM II) on 2 May 2005 and observes a central rate of lira and standard fluctuation margins (±15%) vis-à-vis the euro. Malta unilaterally maintains the exchange rate of the lira at the central rate vis-à-vis the euro. Slovenia: the Slovenian tolar joined the Exchange Rate Mechanism II (ERM II) on 28 June 2004 and observes a central rate of and standard fluctuation margins (±15%) vis-à-vis the euro. The tolar will leave ERM II when Slovenia adopts the euro on 1 January Slovakia: the Slovak koruna joined the Exchange Rate Mechanism II (ERM II) on 28 November 2005 and observes a central rate of and standard fluctuation margins (±15%) vis-à-vis the euro.

23 The Euro Area Enlargement Balassa – Samuelson Effect Traded goods sector (manufactured goods) Economic catch up implies higher productivity growth in traded goods sector Higher productivity leads to higher wages for worker in this sector Non-traded goods sector (services) As labour is mobile between the traded and non-traded goods sectors, wages in the services sector rise as well But productivity does not increase in the services sector. Consequently, prices of services rise. Inflation is higher than in the EU15 Real convergence (higher productivity growth) conflicts with nominal convergence (to a common inflation level)

24 5. The EU Unemployment Basic Facts

25 5. The EU Unemployment Basic Facts

26 5. The EU Unemployment Basic Facts: Duration of Unemployment

27 5. The EU Unemployment Basic Facts: Young Unemployment Rate