The Road to the Euro: Exchange Rate Arrangements in European Transition Economies

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Abstract
This paper examines the monetary policy road of the 10 candidate countries from central and Eastern Europe (CEE-10) on their way to accede the EU and ultimately to adopt the euro. We proceeds in three steps. First, we describe the evolution of the monetary regime of the CEE- 10 since the demise of the centrally planned economic system. Second, we deal with the currency crises of emerging market economies in the 1990s and develop potential lessons for the CEE-10. Third, we delineate the road map for the candidate countries by looking both at formal requirements and economic challenges that these countries have to meet before they can adopt the euro. Potential problem areas that may arise on the road to an enlarged Eurozone include a real growth loss in the core countries, discretionary redistribution associated with financial transfers which are necessary if countries forgo the exchange rate instrument and there are no flexible prices and wages and no mobile capital, and financial instability which may arise if the exchange rate is pegged in candidate countries with a weak banking and financial system and which is not supported by consistent, stability-oriented macro policies..

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