engleski

External Balance and Financial Crisis - Prospects for Croatian Participation in the EMU

With the beginning of the 90s and the breakdown of command economies in Eastern Europe, growth potentials for all European countries have considerably increased, opening up prospects for more dynamic economic development. Encouraged by that, developed countries of the EU embarked on the process of deeper and wider economic integration whose main aspects – economic liberalization and monetary integration in particular – coincided with the efforts on global scale which included worldwide globalization of trade and capital flows. By satisfying the development needs of prospect EU-member countries, the EU has created additional new market for its own economic agents, while on the other hand the East European economies did not hesitate to accept the challenges of fast economic liberalization and institutional reforms aimed at making them better prepared for economic integration. The advantages were mutual and self-enforcing – the EU has improved its economic role and negotiating power in the world, while the new member countries of the EU have gone through necessary structural reforms and have realized significant transfer of technology and know-how (mostly through FDI) as a necessary precondition for further economic growth and development. However, financial crisis and credit crunch whose effects spilt over from the USA to the European continent have brought economic growth to a halt and still without reliable estimations for the near future. As a laggard country in the process of economic integration, Croatia is in particularly difficult position – besides soaring trade deficit it is highly indebted and strongly dependant upon foreign capital. Although monetary policy holds prices and exchange rate tightly under control, it is becoming more obvious that macroeconomic stability of Croatian economy is challenged by the forgone structural reforms. Appreciating theoretical inferences on the conditions for successful monetary integration, in particular those relating to production factor mobility and liberalization of respective markets, as well as Croatia's strategic economic and political goal of integration with the EU, the question is whether financial market liberalization can cause problems for member countries at different level of development in case of external shock. Therefore, the aim of the paper is to find out if Croatia fulfils the criteria for successful monetary integration with respect to the realized level of financial openness and consequently, the expected risk of external imbalance in the future. The purpose is to shed some light on real limitations in the process of monetary integration and to suggest the adjustments needed for Croatia to function successfully within the monetary union.

optimum currency area; financial integration; external balance; EMU; transition countries

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