How close are the New Member States to EMU?: Evidence of a two-speed strategy

In this paper we apply two complementary empirical criteria to eight New Member States (NMS) of the European Union to determine which of them are ready for a fast adoption of the euro. In a first step, we recover demand and supply shocks for each country and for the euro area, and calculate the social losses implied by the two relevant exchange rate regimes, flexible rates and currency board. In a second step, we calculate the real exchange rates variability that these countries are currently experiencing and compare it to that of three Mediterranean countries during a similar period before they joined the EMU. Putting together the results of both tests, it follows that Estonia and Slovenia are the only countries that seem ready to adopt the Euro within the shortest period of time foreseen by the Mastricht criteria; that is, after the two mandatory years in the ERM2. The rest of the countries will probably still need some exchange rate flexibility to absorb external shocks in the coming years