Bg-to-euro - Working Paper D 5.3 Costs and Benefits of Euro...

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Working Paper D 5.3 Costs and Benefits of Euro Adoption in Bulgaria Georgy Ganev March 2010
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Costs and benefits of Euro adoption in Bulgaria 1 Georgy Ganev March 2010 Abstract This study presents a cost-benefit analysis of euro adoption for the case of Bulgaria. Based on a review of existing similar studies for other East European EU member states, it outlines the basic types of potential costs and benefits of euro adoption, and applies them to the specific Bulgarian economic and economic policy context. The most important relevant features of the Bulgarian economy with respect to the analysis are found to be the catching-up status of the country and the currency board arrangement. In this context the study finds that a net benefit of above 15 % of GDP in a 20 year horizon can be expected for Bulgaria due mainly to enhanced capital inflows and to a smaller extent to a boost in trade with the EU and to higher domestic saving in light of enhanced policy credibility. Along the way the study attempts to draw attention to important nuances which may be of relevance for the analysis of euro adoption in Eastern Europe in general. Keywords: Bulgaria, euro area, euro adoption, cost-benefit analysis JEL Classification: E52, F15, F33, F42 1 Financial support from the European Commission (7th Framework Programme, Grant Agreement No.217266) is gratefully acknowledged.
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Page 3 of 34 1. Introduction The adoption of the euro as the final act of joining the economic and monetary union is a process facing all countries which have joined the EU since the Maastricht treaty of 1992. Six of them (Austria and Finland from the fourth enlargement, and Slovenia, Cyprus, Malta, and Slovakia from the fifth enlargement) have already completed this process. The underlying logic of the creation of the monetary union within the EU is that the benefits, especially in the long run, of such a development decisively outweigh the relevant costs not only for the union as a whole, but for individual participating countries as well. Empirical confirmation of this logic is still pending, as the history of the euro area unfolds, but the countries which are required by their treaty obligations to adopt the euro need to be able to assess specific areas of potential costs and risks, related to the change in monetary regime, so that they can devise policies for their management. Such an assessment is crucially dependent on specific country context and it is hard to draw general conclusions. The present study concentrates on the context of one particular country – Bulgaria – with the goal to reach and answer to the question about the relevant costs and benefits of euro adoption and about the adequacy of the respective government strategy. While doing this, the study will address a number of issues related to the topic of
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This note was uploaded on 05/04/2011 for the course FINANCE 104 taught by Professor Smith during the Spring '10 term at Abilene Christian University.

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Bg-to-euro - Working Paper D 5.3 Costs and Benefits of Euro...

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