Liberalization of capital flows in the EU accession countries

Membership in the EU requires inter alia full liberalization of capital flows. However, one potential problem is that accession countries can expect large capital inflows as investors bet on their convergence with the rest of Europe. The main danger from the big capital flows is that they can cause sudden changes of the capital flows if the international market changes the estimate for the situation in which the relative country is. This paper has three parts. The first part provides a brief comparative evaluation of financial liberalization policies of several accession countries before they joined the Union. The second part deals with the reasons why big capital flows may occur in the accession countries. We find that channels for inflows are also potential channels for outflows. The capital inflows problem is a big, if not the major challenge for accession countries attempting to accomplish the transition to membership in euro area. The third part discusses the appropriate policy responses to large capital inflows. It is emphasized that accession countries need to develop a sound financial system as a precondition for providing stable and adequate regime of capital movements. At the same time, they have to strengthen the credibility of their macroeconomic policies and their exchange rate regimes in order to avoid the banking and currency crises and to preserve the financial stability in their economies