Economic integration poses policy challenges to countries seeking EU accession

• Pages: 42-44

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Estonia, one of the three Baltic transition economies, attaches high priority to rapid accession to the European Union (EU) and participation in the European Economic and Monetary Union (EMU). In pursuit of this goal, the country has taken great strides toward establishing a market-oriented economy. In an IMF Working Paper, René Weber of the IMF’s Policy Development and Review Department and Günther Taube of the IMF’s European II Department assess the macroeconomic impact and policy challenges for Estonia of EU accession and the potential adoption of the euro. Weber and Taube discussed their findings in an interview with the IMF Survey.

Estonia applied for EU membership in 1995, and two years later, the European Council included it in the first group of countries invited to start membership negotiations. What made Estonia a good candidate for early accession?

TAUBE: Estonia was included in the first group of EU accession candidates together with four other transition countries—the Czech Republic, Hungary, Poland, and Slovenia—because of its strong macroeconomic and structural policies that had led to major progress in disinflation, external stability, and growth. Underpinned by a currency board arrangement—the Estonian kroon is fully convertible and has been tied to the deutsche mark at 8:1 since 1992—Estonia has generally pursued prudent fiscal policies. It has made great strides in liberalizing and deregulating the domestic economy and privatized most state-owned enterprises. Estonia has welcomed foreign investors and liberalized its external trade. By including the smallest and most northern Baltic country in the “first wave” of accession candidates, the European Union recognized Estonia’s strong and successful efforts to become a market economy, achieve macroeconomic stability, and make its regulatory environment compatible with that of the European Union.

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Joining the common market entails both costs and benefits for EU accession candidates. How will the costs for Estonia of joining the EU common market stack up against the benefits? What is the role of trade in determining this outcome?

WEBER: First of all, one has to keep in mind that any cost-benefit assessment of EU accession is to a large extent judgmental. In the case of Estonia, the assessment is complicated by the fact that economic integration with Western Europe is already well advanced and set to intensify further in the run-up to full membership. EU accession and eventual participation in EMU are additional steps and part of an...