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THE RISKS OF A TOO QUICK EURO ADOPTION BY THE EU MEMBER STATES. THE CASE OF PORTUGAL

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Author(s): Cristian Stefan Ovidiu

Journal: Annals of the University of Oradea : Economic Science
ISSN 1222-569X

Volume: 1;
Issue: 2;
Start page: 25;
Date: 2011;
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Keywords: euro | risk | Portugal | adoption | EMU

ABSTRACT
In this article we present the risks faced by the new countries that have joined the European Union, and which also desire to adopt the euro currency as quickly as possible. We will analyze the existing literature regarding the ways these risks manifest themselves, depending on the economic conditions present in these countries. The risks are mostly caused by an incomplete fulfillment of the optimum currency area conditions, especially the ones regarding the synchronization of the business cycles, the existence of mitigation mechanisms in the case of asymmetric shocks, and to a lesser extent, the insufficient flexibility of the European labor markets. In addition, because there are different economic conditions between the countries that plan on introducing the euro currency and the ones that already had, mostly related to a lower economic development and lower prices, there are specific risks that affect the former countries. Moreover, the benefits of entering the EMU greater monetary stability, reduced transaction costs, lower exchange rate volatility and a decrease of the interest rates can in some specific cases become also costs. In order to quantify all these elements, we have constructed a case study of Portugal, which has entered the EMU in the first wave. We have determined that Portugal's experience after the euro introduction was a negative one, when compared with the previous period, because the convergence process did not actually happened, as expected. Not only that, but the economic differences between Portugal and the other EMU countries deepened, and the country's fiscal situation also deteriorated badly in all these years, up to the point where Portugal was forced to ask for external help. The case of Portugal is very important for the countries that are eager to adopt the common currency without first achieving a sustainable economic development, through increasing labor productivity and exports. It shows that fulfilling the nominal criteria and entering EMU must not be a declared goal, but just the last measure implemented after reducing the economic disparities and reaching a balanced economic development. Based on the existing realities from the Central and Eastern European states, different scenarios can be constructed that will take into account the way these risks influence the future economic environment, should these states were to decide accelerating the common currency adoption process.
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