Jérôme Trotignon

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

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 Latvias 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.

Are the New Trading Blocs Building or Stumbling Blocks ? A Gravity Model Using Panel Data

We will be asking ourselves if the trading blocs created or renewed since the end of the 1980s favor the multilateralization of trade, and so constitute building or stumbling blocks. In a gravity model using panel data, we estimate a set of three regional dummies representative of intra-bloc trade, extra-bloc exports and extra-bloc imports. Taking the resulting three coefficients as a starting point, we propose an original typology of trade creations / diversions and of trading blocs. In applying it to our results, all the groups chosen as well as the Economic and Monetary Union, are shown to be building blocks. No trade diversion is noted, with the exception of an export diversion brought about by North American Free Trade Agreement.

EMU enlargement towards CEEC’s: risks of sector-based and geographic asymmetric shocks

The future membership of CEECs in the eurozone involves the risk of external asymmetric shocks, due to too strong a dependence on one sector or one customer country. By defining two indicators - sector-based and geographic - of exposure to shocks, taking into account the symmetry of the export structures of a candidate state with the EMU and the opening rate of the candidate state, we are able to draw up a classification of countries according to the fulfillment of Kenens criterion, revised and transposed to the geographic variety of exports. The results, compared with those of the two countries of the EMU which are most sensitive to sector-based and geographic shocks (Finland and Ireland), testify to a generally pronounced exposure to shocks. An inventory of the pairs country / branch and country / destination at the origin of shocks with strong macroeconomic impact shows that Bulgaria and Slovakia, and even more Estonia and Latvia, are exposed to major risks. Thus, these two small economies would be well advised to create a cyclical stabilization fund before envisaging joining the EMU. Against the thesis of the endogeneity of the OCAs (optimum currency areas), this recommendation remains valid, insofar as the increase in the share of intra-industry trade between the EMU and a candidate state does not necessarily entail a convergence of multilateral sector-based export structures.