EU Accession and the Euro: Close Together or Far Apart?

Peter B. Kenen (Princeton University) and Ellen E. Meade (London School of Economics)
Policy Brief
03-9
October 2003

One of the preconditions for entering European Monetary Union (EMU) is that the accession countries achieve exchange rate stability. To this end, they must participate for two years in an exchange rate mechanism known as ERM II, under which they cannot permit their currencies to rise or fall by more than 15 percent from an agreed central rate vis-à-vis the euro. Earlier this year, however, Pedro Solbes, the European commissioner for economic and monetary affairs, said that a stricter test would be used to assess exchange rate stability: the 2¼ percent band that prevailed when the Maastricht Treaty was drafted in 1991. Kenen and Meade urge the European Commission to reconsider this position, which ignores the changes in the economic environment resulting from the creation of EMU itself. They warn that the stricter test would bar the accession countries from availing themselves of the 15 percent band and thus expose those countries to the risk exchange rate crises. Furthermore, it could make it harder for them to achieve price stability-another precondition for entering EMU.