Zdeněk Tůma: EU enlargement and monetary integration Remarks by Mr Zdeněk Tůma, Governor of the Czech National Bank, at the 3rd ECB Central Banking Conference “The New EU Member States: Convergence and Stability”, Frankfurt, 21-22 October 2004. *  *  *  Ladies and gentlemen, It has been only recently since we had become members of the European Union. It is only natural that, once the immediate effects of the enlargement have subsided, policy-makers´ attention should shift towards the next step - monetary integration of the twenty-five current EU member states. The first thing to be considered when discussing European monetary integration is how the different countries will go about adopting the euro. There is no universal strategy that can be used by all new EU member states. The euro may either be adopted rapidly, or after a longer interim period. In the pre-EMU period, the emphasis can be put either on ensuring the low inflation required by the Maastricht Treaty domestically, or on importing it by fixing the exchange rate. The key factors that determine which strategy to adopt are, in my opinion, the size and flexibility of the domestic economy, the current monetary-policy regime and its credibility as well as the state of public finances. Specifically, small countries that have lived with fixed exchange-rate regimes for the last ten years, and have thus developed economies flexible enough to compensate for fixed exchange rates will most likely benefit from faster adoption of the euro.
However, the strategy of “leaning against the wind” is not entirely without problems, even if it may sound fairly simple. Many economists have criticised this strategy. The main critics considered, at least prior to the crisis, that although it may indeed involve an imbalance, the best strategy was for the central bank to confine itself to “cleaning up afterwards” once the bubble had actually burst. In their view, “leaning against the wind” often would not lead to  BIS Review 70/2010  3  more stable developments, but instead risks amplifying fluctuations. Three main arguments have been raised by critics against the policy of “leaning against the wind”. Difficult to identify a bubble and to do so in time? To begin with, it must be possible to identify the imbalance or potential bubble and to do so at a sufficiently early stage. The critics claim that this is very difficult and they often use the term “bursting bubbles” when talking about monetary policy and asset prices. The idea of bursting a bubble has much more dramatic associations than the expression “leaning against the wind”. If the developments that are judged to be unbalanced are actually justified by the fundamental driving forces, then a higher interest rate would curb growth unnecessarily. It could also cause problems if one fails to identify the imbalance sufficiently early and tries to remedy it too late. Then there is a risk of larger fluctuations in both asset prices and economic activity, completely contrary to the initial aim. Is this criticism justified?