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Membership in ERM 2 – a literature review of Croatian and Bulgarian perspective

Each country joining an economic and monetary union is facing a different set of benefits and risks, which is proven also by the experience of the European Economic and Monetary Union (EMU) member states. The Exchange Rate Mechanism (ERM 2) was set in 1999 and as a part of nominal convergence criteria two year participation in the ERM 2 represents the first formal step towards the adoption of the euro. Its main purposes are to ensure economic stability within the single market and help countries prepare themselves for participation in the euro area. As much this criterion is clear, on the other hand, it is considered that preconditions for joining the ERM 2 are not defined straightforwardly. Currently, ERM 2 includes the currencies of three countries: Bulgaria, Croatia and Denmark. The focus of this paper is on the Bulgaria and Croatia, as members of the ERM 2. They both joined the ERM 2 on 10 July 2020, with central parities of their currencies against the euro determined at the level considered to be consistent with the long-term equilibrium of the economy. Additionally, Bulgaria committed to continue its currency board arrangement within the ERM 2 and the Croatian kuna observes its central rate to the euro with a standard fluctuation band of ±15%. This paper examines the Bulgarian and Croatian paths to the ERM 2. The main goal of the paper is to give a literature overview of current conditions, including the path to the ERM 2 for the two observed countries, but also including the experiences of peer countries. In doing so, the contribution of the paper is threefold. First, it gives an overview of the main features of ERM 2 functioning and the role of the ERM 2. Second, it provides summary of the experiences from previous and potential ERM 2 memberships and thirdly, it enables understanding possible effects for these two countries which help policymakers to develop approaches for improving performance in the ERM 2, as well as in the process of euro adoption. Additionally, the influence of COVID- 19 crisis is taken into consideration. Finally, one might conclude that a path towards Eurozone is unique for every country, both in terms of internal and external factors.

Exchange Rate Mechanism 2 ; Croatia ; Bulgaria ; euro ; COVID-19

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