project7i - Bulgaria and the Euro: an Application of the...

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Bulgaria and the Euro: an Application of the Optimum Currency Area Theory. Master’s Class Institute of Economics University of Copenhagen March 20, 2004 Abstract: Soon Bulgaria will finalize the negotiations with the European Union (EU) and eventually, in the near future, will become a member of the Union. Then the country will have to face the question whether to join the Euro zone or stay outside, as some other member states have opted. This paper discusses if Bulgaria should adopt the Euro as an official currency, and when and how this should happen. The discussion is based on the theory of the Optimum Currency Area (OCA). I calculate OCA index for Bulgaria and argue that the country should join the Euro area, but this should not happen unilaterally (euroisation), but after receiving official membership in the European Monetary Union (EMU).
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1. Introduction Bulgaria is in the process of finalization of the negotiations with the EU and as expected in 2007 will probably join the Union 1 . Then, just like all the rest of the new member countries, Bulgaria will have to decide on if to join the EMU and have the Euro as an official currency. The proposition for those new member countries is first to stay for a period of two years in the so-called Exchange Rate Mechanism II (ERMII), where they will have to keep their currencies fluctuating not more than +/- 15% against the Euro, and then join the EMU 2 . This implies that Bulgaria can possibly join the EMU in 2009. But the discussion for introducing the Euro is already underway now. Prominent economist 3 are advising Bulgaria not to wait and adopt the Euro (unilateral euroisation) before joining the EMU. Others say that the country should wait and adopt the Euro, only and after, the country is admitted as a member in the EMU. Despite different, those two opinions do not argue on whether Bulgaria should adopt the Euro, but on how this should happen and the timing. One can easily say that in Bulgaria, accepting of the Euro as the country’s currency is perceived rather as a destiny, than a rational economic decision. Through this paper, I shall try to give an answer to the questions if and how Bulgaria should adopt the Euro as an official currency. My arguments will be based on the Optimum Currency Area(OCA) theory and this will be so because the question of if a state should join a Currency Area (CA) or form such is explained within the framework of the OCA theory. The paper is organized in the following way: first, I introduce the framework of the OCA theory, then I calculate OCA index for Bulgaria which should say if it is beneficial for Bulgaria to join the EMU and finally discuss how and when possible joining of the EMU should happen. 2. Optimum Currency Area Theory
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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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project7i - Bulgaria and the Euro: an Application of the...

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