Effects of Economic and Financial Crisis on Nominal Convergence Indicators in New Member States

• Author: Iulia Lupu, Camelia Milea, Alina Georgeta Glod, Adina Criste
• Pages: 530-536

Effects of Economic and Financial Crisis on Nominal Convergence

Indicators in New Member States

Iulia Lupu1, Camelia Milea2, Alina Georgeta Glod3, Adina Criste4

1CCFM, 2CCFM, 3CCFM, 4CCFM

Abstract. The import ance of compliance with nominal convergence criteria is crucial for adopting the euro

in New Member States (NMS). Although some of these countries have made re markable efforts for

complying with nominal cr iteria, structural a nd conjunctional macroeconomic imbalances have created big

problems in this respect. Also, the global financial crisis revealed new challenges for the NSM which are not

yet members of the euro area. Ha ving imbalances widened further much more than the c ountries in the euro

area, many of them have come to appreciate the protection of the euro area membership, especially at times of

financial and economic crises. Though, some NMS would like to speed up euro adoption, they now face

conditions that may make it more difficult for them to satisfy the requirements of the nominal c onvergence

criteria. Thus, in this article we try to capture the effects of economic and financial crises on the nominal

convergence indicators in NMS.

Keywords: inflation, long term government bond yields, exchange rate, fiscal and budgetary criteria

1 Introduction

The New Member States of the European Union are affected by the ongoing global financial crisis,

and growth will be slower this year and next due to weak external demand and tight credit conditions.

The global financial crisis created new challenges for the countries which have joined the European

Union since 2004 and are not yet members of the euro area. Having suffered stronger market

disturbances than the countries in the euro area, many of them have come to appreciate the protection

that euro area membership can provide at times of financial crises and would like to speed up euro

adoption.

Being in the process of economic catching up, the new member states have to struggle to create

economies similar in structure with those of the old members of European Union and to assure, in

time, a steady growth of real GDP toward the levels of the most developed countries in the euro area.

This situation can be challenging for NMS because they have to satisfy Maastricht criteria, especially

the exchange rate and inflation criteria, which are harder to tackle. It is known that, under the fixed

exchange rate arrangement, the convergence of prices during the catching up process can only take

place through higher inflation and in the floating exchange rate, the price level convergence can take

place by a nominal appreciation of the exchange rate or higher inflation, or by both. In crisis situation,

it is a real provocation for all NMS to try to maintain the indicators of convergence under the reference

values. In this article we will analyze each of them: inflation, long-term interest rate, exchange rate,

governmental deficit and public debt.

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