All of the new EU member states (NMSs) have made a commitment to adopt the Euro. This essay considers the countries' economic
readiness to adopt the Euro as well as the economic benefits and costs of adoption. The Paper applies a method suggested by
Bayoumi and Eichengreen (1997) and finds that the changes of real effective exchange rates between the Euro area and the new
EU member states follow the pattern predicted by the optimum currency area theory. This finding allows the construction of
the readiness for adoption index for every NMS. The tangible benefits (for NMSs) of adoption are also examined in this essay.
Analyses suggest that the costs of currency exchange and hedging against the uncertainty in foreign exchange markets account
for about 0.08 to 0.012 percent of the countries' GDP. In addition, countries that adopt the Euro might expect lower inflation
and interest rates. This essay also examines the possible costs of adoption. These are in the forms of the lost ability to
use monetary policy tools and set the level of seigniorage. Analysis suggests that many countries had given up their independence
over monetary policy even before the accession to the EU. In addition, bigger NMSs have not used seigniorage as the source
of fiscal income. However, they used exchange rate flexibility to depreciate their currencies during the recent crisis.
Keywords:Economics of EU enlargement, Euro area enlargement, Monetary unions, Currency adoption
Forschungsbereich:Makroökonomie und öffentliche Finanzen