à Oesterreichische Nationalbank Focus on Transition 2/2000 Legend Ð = The numerical value is zero . = Data not available at the reporting date x = For technical reasons no data can be indicated 0 = A quantity which is smaller than half of the unit indicated _ = New series Note: Apparent arithmetical discrepancies in the tables are due to rounding. Published and produced by: Oesterreichische Nationalbank Editor in chief: Wolfdietrich Grau Secretariat of the Governing Board and Public Relations Contributions: Peter Backe«, Stephan Barisitz, Sandra Dvorsky, Jarko Fidrmuc, Rena Mu¬hldorf, Andreas Nader, Thomas Nowotny, Kurt Pribil, Thomas Reininger, Franz Schardax, Cezary Wo«jcik, Foreign Research Division Editorial work: Rena Mu¬hldorf, Susanne Steinacher, Foreign Research Division Layout, set, print and production: Oesterreichische Nationalbank, Printing Office Orders: If you are interested in regularly receiving future issues of ÒFocus on Transition,Ó please write directly to Oesterreichische Nationalbank Mail Distribution, Files and Documentation Services Otto-Wagner-Platz 3, A-1090 Vienna, Austria Postal address: P.O. Box 61, A-1011 Vienna, Austria Telephone: (+43-1) 404 20, ext. 2345 Fax: (+43-1) 404 20 2399 Internet address: http://www.oenb.at Paper: Salzer Demeter, 100% woodpulp paper, bleached without chlorine, acid-free, without optical whiteners. DVR 0031577 Contents Imprint 2 Editorial 7 Recent Economic Developments Developments in Selected Countries 12 Jarko Fidrmuc, Cezary Wo«jcik and Stephan Barisitz Studies More ÒPre-InsÓ Ante Portas? Euro Area Enlargement, Optimum Currency Area, and Nominal Convergence 28 Jarko Fidrmuc and Franz Schardax In this paper, the authors apply the OCA theory to a future enlargement of the euro area by CEECs. Trade links and synchronization of business cycles have increased between several CEECs and EU countries recently. Apart from trade intensity, the authors show that intraindustry trade provides additional information to explain convergence in business cycles. Finally, the application of Frankel and RoseÕs (1998) relation between the degree of trade integration and the convergence in business cycles to CEECs and EU countries predicts a comparable degree of business cycle harmoniza- tion of CEECs with EU countries as for current members for the medium term. Furthermore, the authors analyze the issue of preserving competitiveness and price stability within an enlarged EMU. They find that the development of competitiveness in selected CEECs between 1992 and 1998 differed significantly. According to the authorsÕ findings, the Balassa-Samuelson effect exerted a powerful influence on inflation rates in CEECs and is expected to continue to do so in a monetary union. A Critical Review of Unilateral Euroization Proposals: The Case of Poland 48 Cezary Wo«jcik Some academics have proposed unilateral euroization as a solution to the alleged ineffectiveness of macroeconomic policies in the run-up to European Union accession and, furthermore, as a device to bypass fulfillment of the Maastricht inflation criterion. The European Union, in turn, has made it very clear that unilateral euroization does not constitute a viable option for the monetary integration of candidate countries and that it would run counter to the underlying economic reasoning of EMU in the (EC) Treaty. This study attempts to shed some light on the economic issues involved and thus to contribute to the discussion. As euroization is of a fairly empirical nature and its final costs and benefits depend on the distinctive features of the economy, the analysis focuses on the case of Poland. The potential benefits of unilateral euroization and the drawbacks of such a policy move are analyzed. The paper arrives at the conclusion that the often cited benefits of hypothetical unilateral euroization are much less clear-cut than they would appear to be at first glance, while the costs and risks are considerable. In general, a hypothetical euroization would be a risky venture for Poland that could delay the real convergence of the Polish economy rather than accelerate it. Focus on Transition 2/2000 × 3 Contents Measuring Central Bank Independence in Selected Transition Countries 77 Sandra Dvorsky The paper measures the degree of legal and actual central bank independence (CBI) in five Central and Eastern European transition economies striving for EU accession, namely the Czech Republic, Hungary, Poland, Slovakia and Slovenia (CEEC-5). The degree of legal CBI is measured by applying the two most widely used indices, the Cukierman and the Grilli-Masciandaro-Tabellini (GMT) indices. Moreover, the turnover rate of central bank governors is used as a proxy to measure actual CBI. The paper gives an interpretation of computed results, comparing the findings with those of other authors and earlier calculations. Furthermore, the indices on legal and actual CBI themselves are critically reviewed, in particular against the background of the Maastricht Treaty requirements, which in practice constitute the driving force for any amendment of central bank laws in the CEEC-5. The paper concludes that the overall degree of legal CBI is comparatively high in all countries examined, while the measured turnover rates of governors do not seem to fully reflect the degree of actual CBI in the CEEC-5. A comparison of requirements imposed by the Cukierman index to the Maastricht Treaty requirements reveals potential implications for future measurement of legal CBI not only in the CEEC-5, but also in other EU accession countries, if the Cukierman methodology is applied. The Development of the Croatian Banking Sector since Independence 96 Stephan Barisitz Banking reforms in independent Croatia have proceeded relatively slowly compared to the most advanced central European countries, but they have recently gained momentum. The delicate geopolitical situation of the country, its involvement in armed conflicts on its own territory and in adjacent parts of former Yugoslavia, CroatiaÕs long-standing political isolation from the EU and other factors have not been conducive to structural reforms. The early years of independence featured major upheavals and losses for the banking business. In 1993, the authorities opted for a radical macroeconomic stabilization program that met with impressive success for some years. But a significant part of the banking sector was still ailing, and the government decided to bail out some of the largest banks by massive issues of government bonds. In the following years, some rapidly growing private banks attracted a large amount of foreign currency flowing back into the country. But imprudent lending brought them into difficulties, triggering a new banking crisis in 1998Ð99, which contributed to a mild recession. This time, the Croatian National Bank was equipped with enhanced legal authority and initiated bankruptcy proceedings in a number of cases. The year 2000 has seen a confluence of positive macroeconomic and structural changes, in particular a spate of transactions with foreign strategic investors purchasing stakes in leading banks. 4 × Focus on Transition 2/2000 Contents OeNB Activities Completing Transition: The Main Challenges Ð The OeNBÕs East-West Conference 2000 124 Peter Backe« Lectures Organized by the Oesterreichische Nationalbank The IMFÕs Assessment of Current Economic Developments in Transition Economies Ð Some Comparisons Ð Thomas C. Dawson 137 EU Enlargement: Current Questions Ð Albrecht Rothacher 139 Catching Up in the Enlarged Euro Area: A Common Challenge for Monetary Policy Ð Nils Bjo¬rkste«n 142 EU Enlargement Ð Gu¬nter Verheugen 143 Technical Cooperation of the OeNB with Countries in Transition 145 Statistical Annex Compiled by Andreas Nader Gross Domestic Product 148 Industrial Production 148 Unemployment Rate 149 Consumer Price Index 149 Trade Balance 150 Current Account 150 Total Reserves Minus Gold 151 Central Government Surplus/Deficit 151 Gross External Debt 152 Exchange Rate 152 Official Lending Rate 153 The views expressed are those of the authors and need not necessarily coincide with the views of the Oesterreichische Nationalbank. Focus on Transition 2/2000 × 5 Editorial The Oesterreichische NationalbankÕs semiannual periodical Focus on Transi- tion, first published in 1996, is addressed to all readers Ð researchers, policy- makers, analysts, students Ð with an interest in the analysis of developments in Central and Eastern Europe. This volume of the Focus on Transition contains four parts: an update of recent economic developments in selected countries, a studies section with four studies, a summary of the latest activities of the Oesterreichische Natio- nalbank dealing with transition (lectures, discussions, technical cooperation) and a statistical annex. The recently published regular reports 2000 on the progress of candidate countries toward EU accession illustrate that the differences among accession countries are significant. The reports stress that Estonia, Hungary and Poland as well as the Czech Republic and Slovenia are functioning market economies and should be able to cope with competitive pressure and market forces in the EU in the near term provided they maintain the current reform path (Estonia, Hungary and Poland) or complete and implement the remaining reforms (the Czech Republic and Slovenia). Latvia, Lithuania and Slovakia can be regarded as market economies, but need to make relatively more progress to cope with competitive pressure and market forces in the medium term. Bulgaria