Abstract
Over the past decade two transformations have changed the landscape of Europe: the European Union and the transition in East European countries. Countries like Estonia, Hungary, and Poland have become “converging” countries more than emerging countries. Their experience offers insight on aspects of policy design that helped proof them against turbulence in international markets. In a world of liberalized markets, the international financial architecture has to be strengthened by solving some problems like herding behavior and contagion, moral hazard, and information on markets. The International Monetary Fund has to play a big role in these innovations and challenges.
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Notes
The transition economies sufficiently advanced in reform to have been identified as first-round candidates for EU accession—an approach now being broadened—were the Czech Republic, Estonia, Hungary, Poland, and Slovenia.
The Balassa-Samuelson effect is the significant increase in the relative price of nontradables that results from their relatively limited supply, under conditions where productivity in tradables is rising sharply relative to that in nontradables (a feature of economies undergoing a productivity catch-up to advanced economy levels).
The President of the European Central Bank, in his 1999 Per Jacobson lecture, stressed that the economic steps of accession should be seen as a continuum: joining the European Union, joining ERM Il, and adopting the euro.
The sweeping, and unprepared, regime shifts in the United Kingdom, Sweden, and Finland, in their successful moves to inflation targeting, signal that these concerns should not be exaggerated, provided inflation targeting is pursued singlemindedly and with appropriate transparency. These countries exited from fixed exchange-rate regimes in crisis situations, with the credibility of monetary policy initially low, and with no prior preparation of an inflation targeting regime.
The Copenhagen criteria include, regarding economic aspects: (1) stability of institutions guaranteeing the rule of law; (2) a functioning market economy, able to meet EU competitive pressures and market forces; and (3) ability to take on the obligations of membership, including adherence to the aims of economic and monetary union the (acquis communautaire). Macroeconomically, a core requirement, together with goals of high growth and employment, is convergence toward stability—ultimately, for monetary union, that defined in the Maastricht criteria (with its well-known conditions relating to inflation, interest rates, exchange rates, and fiscal deficits) and, more recently, the Stability and Growth Pact.
More generally, containing the external current-account deficit through fiscal tightening alone (rather than looking for microeconomic factors that may be influencing it) is a very shorthand approach to addressing vulnerability. And calibrating current-account targets on sustainable direct investment flows overlooks the sometimes sizable loan component of such flows, as well as direct investors’ ability to shift quite sharply the location or currency in which their liquid balances are held. Gross as well as net flows matter; so do stocks of liquid assets and liabilities.
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© 2000 Springer Science+Business Media New York
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Watson, M.C. (2000). International Financial Architecture and the Economic Renaissance in Europe. In: Savona, P. (eds) The New Architecture of the International Monetary System. Springer, Boston, MA. https://doi.org/10.1007/978-1-4757-6766-7_7
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DOI: https://doi.org/10.1007/978-1-4757-6766-7_7
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