Poland's Road to Euro: A Review of Options

Euroization is an important part of what appears to be a new general ten- dency in the world economy, one towards fewer but better monies (Dornbusch, 2001). The main arguments in favour of the European Union (EU) countries adopting a common currency fall, I think, into three categories: (a) those related to international trade and static efficiency gains, (b) those related to stability, and (c) those related to growth. Although these arguments are well known, I should like to recall them briefly, in order to make the point that while (a) applies to all countries, (b) and (c) apply mainly to the least developed members and candidates of the EU. Trade and efficiency: The elimination of an exchange rate risk within a common currency area (CCA) reduces the transaction cost in international trade and therefore stimulates the integration of national markets for traded goods. This in turn creates opportunities to reduce costs through economies of scale and increased competition. The efficiency gains of this kind should be enjoyed by all CCA countries, but especially those which trade a great deal with other EU countries. Stability: The arguments in this category note that the countries whose record of stability was poor in the past stand to improve significantly the credibility of their macroeconomic policies. Credibility gains in those countries would result in lowering inflation expectations, which in turn would lower both current interest rates and the cost of keeping the inflation rate at a low level. Further implications would be a lower cost of servicing public debt and smaller speculative and destabilising capital inflows. Benefits of this kind have been already enjoyed by some countries of the EMU, notably Italy, Spain, Portugal and Greece. However, credibility gains would be particularly strong for new EMU members belonging to the group of emerging market economies (EMEs), such as Poland or Turkey. For the credibility of macroeconomic