Costs and Benefits of Eurization in Kosovo

• Author: Mirvete Badivuku-Pantina; Mihane Berisha-Namani
• Pages: 343-353

Mirvete Badivuku-Pantina. Associate Professor, Ph.D., Department of Economics, Faculty of Economics, University of Pristina, Kosova (myrvetebadivuku@yahoo.com).

Mihane Berisha-Namani. Assistant Professor, Ph.D., Department of Economics, Faculty of Economics, University of Pristina, Kosova (e-mail: mihane_berisha@yahoo.com).

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Introduction

In the ten-year period Kosovo has shifted from a post-conflict country to a country that is considered in transition. It has moved away from concentrating in the reconstruction of the country toward economic development and integration into European structures. Still, the economic development is insufficient to address the challenges that Kosovo is facing, such as the high rate of unemployment, high deficit in the trade balance and the inappropriate economic structure. During 2007 Kosovo had an increase of GDP by 3.5% and it is clear that Kosovo needs a higher degree of economic growth in order to address the challenges it faces. The trade deficit remains high whereas exports are minor due to limited production capacities for export and the inability to compete with the competition. The coverage of imports with exports still remains very low, around 8%. Based on the statistics of 2005, most of the companies registered in Kosova were concentrated in the trade/services sector (about 50% of all companies), transport and communication (10-14%), hotels and restaurants (8-10%), and construction (4-5%). The participation of production enterprises in the general number of registered enterprises was between 8% and 9%. Unemployment rates vary from about 30% (IMF, 2004) to about 40% (SOK, 2006). The largest participation in the labor market in Kosovo, by over 40% is composed of youth, between the ages of 16-24. About 28,000 new employment seekers enter the labor market on a yearly basis.

Economic integration of the world by means of exchange of goods and services, licenses and knowledge, export of capital and economic-technical as well as financial cooperationPage 344 represents one of the main characteristics of modern economy. Reality shows that all EU member states, within the framework of this cooperation, have achieved considerable results and have benefited in every area of life. Therefore, economic interest should serve as the key incentive for countries of Western Europe, Central Europe, Southeast Europe as well as the Balkans countries, which would bring benefits for all those that cooperate, also Kosovo, as part of the Balkans which aims to become part of the EU. The abandonment of the national currency and adaptation of another currency as in the case of Europe in the Eurozone is not a process that has taken place without the feeling of having lost sovereignty by each state separately in the process of handing over this attribute toward European unilaterateration. The beginning of 2009 marks the 10^th anniversary of Euro, the currency that accession of the economic and financial policies of hundreds of millions of Europeans. The countries that have the Euro now enjoy a larger and safer market with less risk of devaluation and inflation. Euro currently represents the largest currency in Europe and it is among the strongest currencies in the world. Euro provided Kosovo with a stable monetary environment; it alleviated economic transactions with the key Kosovo trade partners etc. However, it also provided a cost for the Kosovo economy such as loss of seigniorage income, loss of sovereignty over the monetary policy. However, the costs may be considered acceptable compared to the advantages that were brought to the Kosovo economy by the introduction of Euro.

1. Central Banking System in the European Monetary Union

Lawmakers in the European Parliament were the first in the EU that had promoted the single pan-European currency in the 1960’s. The road toward launching was long, while the European countries hesitated to exchange their national currencies with an untested currency. In December of 1991 leaders of the EU countries signed a historic treaty in the city of Maastricht, Holland, which aimed toward monetary unification in Europe. The Maastricht treaty strategy for moving toward the monetary union in Europe was based on two principles. Firstly, the transition toward the European monetary union was seen as a gradual step that would extend for a period of several years. Secondly, entry into the Union was conditioned with meeting the convergence criteria¹. Technically the monetary union commenced on the January 1^st 1999. This was the moment when Euro started to exist and when the European Central Bank assumed control over central national banks. However, as of January 1^st 1999 until December 31^st 2001, euro existed only in bank passbooks and not physically. The complete monetary union started to exist on January 1^st 2002, when Euro also started to exist in the physical form (banknotes and currencies) and when they moved away from using the national currencies.

After the adaptation of Euro as their sole currency, the EU member states that are part of the Eurozone have abandoned their monetary sovereignty. Therefore, the Eurozone institutions have been established with the Maastricht treaty whereas the monetary policy has been entrusted to the Eurosystem. The Eurosystem is composed of the European Central Bank (ECB) and the National Central Banks (NCB) of the EU countries that have joined the European Monetary Union (EMU). Initially, in January 1999, 11 EU member countries joined the EMU (Belgium, France, Germany, Italy, Luxembourg, Holland, Ireland, Portugal, Spain, Austria, Finland), Greece joined in 2001, Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in January 2009, whereas the Eurozone now contains 16 member countries.

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2. Costs and benefits of the joint currency

It is worthwhile noting that the central national banks, although part of the so-called Eurosystem, cease to undertake independent decisions on monetary policies and the exchange rates. They are there to implement the decisions undertaken by the ECB. In other words, in the complete monetary union, the central national bank either ceases to exist, or it has no real power. This means that the country that joins the monetary union will not be able to change the price of its value (with devaluation and evaluation), to determine the quantity of the national currency in circulation, or change the short-term interest rates.

It is known that various countries have various norms of economic development. Countries that usually have problems with trade balances, if they join the monetary union, would not be able to cover the deficit in the trade balance by means of devaluating the national currency, in order to make products of that country more competitive in the external market. Countries also differ due to the fact that they have different fiscal systems. These differences often compel countries to use various combinations of financing the budgetary deficit. The budgetary deficit may be financed by borrowing and emitting currency or by increasing the inflation. Therefore, countries with less developed fiscal systems, compared to the other countries of the monetary union, will face a higher cost of increasing revenues by increasing the tax norm even through it would be more favorable to increase revenues by means of inflation. However, by joining the monetary union, in case of countries with a lower inflation rate, which they have to respect, they have to increase taxes, or allow their deficit to increase furthermore.

However, utilization of the joint currency brings important benefits to the Eurozone countries such as:

- Decreasing the cost of transaction of member countries

- Improving the allocation efficiency of the price mechanism

- Higher price transparency has an impact on the increase of competition, by which means the consumer benefits

- Stimulation of integration in the other fields (financial, institutional, political)

- Positive impact on the trade flow within the Union.² Elimination of the transaction cost toward another currency surely represents the most noticeable benefit from the monetary union. These costs diminish when the countries utilize the common currency. Information in various countries demonstrates that about 5% of bank revenues are fees that are paid to banks during the exchange of national currencies. Therefore, these costs diminish upon joining the monetary union.

Utilization of the joint currency brings...