EMU Enlargement to Include CEE Countries: Risks of Sector-based and Geographical Asymmetric Shocks

Abstract

Future membership of CEE countries in the euro zone highlights the risk of external asymmetric demand shocks due to too strong a dependence on one sector or one customer country. The purpose of this article is to build two indicators of exposure to shocks—sector-based and geographical—taking into account the symmetry of the export structures of a future member with the EMU and the trade openness of the future member. This enables us to draw up a classification of the CEE countries according to fulfillment of the Kenen criterion, revised and then transposed to the geographical variety of exports. The results, compared with those of the two countries in the EMU which are most sensitive to sector-based and geographical shocks (Finland and Ireland), testify to a generally pronounced exposure to shocks. An inventory of the pairs 'country/branch' and 'country/destination' liable to be at the origin of shocks with strong macroeconomic impact shows that Bulgaria and Slovakia, and to an even greater extent Estonia and Latvia, are exposed to major risks. In so far as Bulgaria and Latvia's real convergence process with the euro zone seems scarcely to have started, these two economies might consider postponing EMU membership or creating a cyclical stabilisation fund on joining. This recommendation contradicts the endogenous OCA theory, which is put forward when intra-industry trade intensifies. However, an increase in the share of intra-industry trade between a CEE country and the EMU does not necessarily entail less exposure to the shocks studied.

New EU member states and the Euro: economic readiness, benefits and costs

“…That might lead to asymmetric shocks. In addition, Trotignon (2005) estimated sector-based (diversification or Kenen criterion) and geographical indicators. He concluded that Bulgaria, Slovakia and to a greater extend Estonia and Latvia might experience future asymmetric shocks because of their industrial structure and export patterns.…”