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Into the EU: Policy Frameworks in Central Europe A Staff team led by Robert A Feldman and C. Maxwell Watson   ©2002 International Monetary Fund May 1, 2002 Use the free Adobe Acrobat Reader to view PDF files Contents   Preface The Road to EU Accession    Change in the Economy    The Financial Sector    Macroeconomic Policies   Enlarging the EU: Accession Requirements and the Central European Candidates Real Convergence to EU Income Levels: Central Europe from 1990 to the Long Term    Sources of Growth During Transition    Structural Policies and Growth During Transition    International Evidence on the Determinants of Long-Run       Growth    Growth Scenarios in the Long Run Financial Sector Evolution: Challenges in Supporting Macroeconomic Stability and Sustainable Growth    Financial Sector Development and Growth    Interlinkages to Macroeconomic Policy    Conclusions A Framework for Financial Stability    The Legal, Institutional, and Supervisory Framework    Intermediating Capital Flows    Risk Management    Financial Safety Nets    International Standards and IMF Surveillance    Conclusions Monetary and Exchange Rate Regimes    Disinflation: Initial Success and Current Tensions    The Run-Up to Accession: Regime Requirements       and Goals in Context    Considerations in Managing Flexible Regimes    Back to the Future: Wide Bands and the Return       to Fixity    Capital Controls and Policy Safeguards Balancing Fiscal Priorities    Facing the Challenges    Medium-Term Fiscal Positions: Choosing an Appropriate Target    Revenue Reforms on the Way to EU Accession    Need and Scope for Expenditure Reforms    Reconciling Fiscal Objectives    Medium-Term Fiscal Management in Practice    Additional Risk Factors: Privatization Receipts and       Fiscal Decentralization The Challenges Ahead Text Boxes 2.1 The Acquis Communautaire 3.1 Estimating the Capital Stock in the CEC5 3.2 Total Factor Productivity Sensitivity Analysis 4.1 Investment Ratios and Capital Intensity: Italy 1960s;    Spain 1970s 4.2 The Macroeconomic Environment and Financial Sector    Stability 4.3 Privatization Methods and Fiscal Costs of Bank Restructuring 5.1 EU Legislation Governing the Banking Sector 5.2 European Commission's Assessment of Progress Toward    Accession in the Area of Financial Services 5.3 Impact of the Russian Crisis 5.4 Capital Inflows into Hungary in Early 2000 5.5 The Financial Sector Assessment Program 5.6 Stress-Testing of the Hungarian Banking System 6.1 Policies for Disinflation 6.2 The Maastricht Inflation Constraint and Szapary's Boxer 6.3 Currency Boards 6.4 The Many Possible Worlds of ERM2 7.1 Pre-Accession Economic Programs (PEPs) in Future    Perspective 7.2 Medium-Term Fiscal Plans of the Accession Countries 7.3 Fiscal Adjustment and Growth 7.4 EU Pre-Accession Assistance 7.5 Planning Spending Restraint—An Illustration for Poland 7.6 Reconciling Medium-Term Fiscal Tensions: Two Cases    From Recent History 7.7 Defining Elements of Medium-Term Fiscal Frameworks Figures 3.1 CEC5: Sources of Growth, 1989–99 3.2 CEC5: Investment to GDP Ratios, 1985–1999 4.1 Broad Money (M2) 4.2 Real Growth of Private Credit, 1996–2000 4.3 Interest Rate Differential, 1995–2001 4.4 Real Deposit and Lending Rates, 1998–2001 4.5 External Liquidity Position: Selected Countries, 1999 4.6 Deposit, Lending and Key-Policy Rates, 1998–2001 4.7 Credit to Private Sector, 1995–2000 5.1 Comparisons of Financial and Balance of Payments    Vulnerability Indicators, 1998–2000 6.1 Monthly Headline Inflation in the CEC5: 1991–2001 6.2 Monthly Core Inflation in CEC5: 1993–2001 7.1 Government Balances in the CEC5 and the European Union,    1993–99 7.2 Revenue and Expenditure Trends in the CEC5 and the    European Union, 1993–99 7.3 Old-Age Dependency Ratio in the CEC5 and    Europe, 1990–2030 7.4 Indicators of Public Spending in the CEC5 and the    European Union, 1998 7.5 Per Capita Income and Primary Current Spending in    Selected Countries, 1998 Tables 3.1 Cumulative Output Growth and Its Sources 3.2 Sources of Growth in Golden Age Europe and Japan,    and Recent East Asia 3.3 Projected TFP Growth for the CEC5 3.4 Panel Regression Results from a Sample of Six Transition    Economies, 1992–99 4.1 Banking Sector Statistics 4.2 Equity Market Indicators 4.3 Profitability and Efficiency Measures, 1995–2000 4.4 Classified Loans/Assets as Share of Total Loans/Claims 4.5 Cost of Bank Restructuring for the Government and    Central Bank, 1991–98 5.1 Extensiveness and Effectiveness of Financial    System Regulations 5.2 Effectiveness of Shareholder Protection 5.3 Deposit Insurance Coverage 6.1 Exchange Rate and Monetary Policy Regimes in the CEC5 6.2 Exchange Rate Regimes and Basic Economic    Characteristics of the CEC5 7.1 Medium-Term Fiscal Frameworks in Finland, the    Netherlands, and the United Kingdom Appendices I. Setting Medium-Term Fiscal Targets: The Role of Public    and External Debt and Current Account Considerations II. Revenue Trends and Tax Structures Appendix Boxes A1 The Impact of Fiscal Policy on Private Saving and Investment Appendix Figures A1 External Debt-to-GDP Ratios in Selected Middle-Income    Countries, 1999 A2 Saving-Investment Balances in the CEC5, 1993–99 A3 Tax Ratios in the CEC5 and the European Union,    1994 and 1998 A4 Structure of Tax Revenue in the CEC5 and the European    Union, 1998 Appendix Tables A1 Fiscal Balances and Public Debt Under Alternative Scenarios A2 Sovereign Ratings of Middle-Income Countries' Long-Term    Foreign Currency Debt A3 External Current Account Balances and Foreign    Indebtedness Under Alternative Scenarios A4 Medium-Term Fiscal Targets Anchored on External Debt    and Current Account Constraints A5 General Government Revenue in the CEC5, 1994–98 A6 Social Contribution Rates in the CEC5, Europe, and the OECD A7 Main Elements of the Personal Income Tax System in the CEC5    and the European Union A8 Corporate and Value-Added Tax Rates in the CEC5 and    the European Union References The Authors

Preface This volume on the economic challenges faced by the countries of central Europe on the road to EU membership was prepared by an IMF staff team headed by Robert A. Feldman and C. Maxwell Watson. The team included Peter Doyle, who helped develop the unifying concept of the chapters, as well as Costas Christou, Christina Daseking, Dora Iakova, Guorong Jiang, Louis Kuijs, Rachel van Elkan, and Nancy Wagner. The material presented here also builds on research carried out by a number of other IMF staff members—including particularly Craig Beaumont, Robert Corker, Paul Masson, and the mission chiefs, desk officers, and resident representatives working on the central European economies. The chapters on monetary and exchange rate frameworks and on fiscal challenges draw heavily on background papers prepared for discussions in the IMF Executive Board in the course of 2001—which reflected information available as of early July and mid-April, 2001, respectively. The intent of the chapters, however, has been to present material and analysis that is of longer-term interest—both to policymakers and the public in the central European economies and to other candidates for EU membership—and they should be read with a focus on methodological and analytical issues rather than for specific projections that are subject to change. These papers benefited from informal seminars with the European Commission and the European Central Bank—and, in an earlier version, an academic seminar at the University of Oxford, organized by Christopher Davis of Wolfson College. The chapters on real convergence and the financial sector appeared in the IMF's Working Paper series, and benefited from seminars with World Bank and IMF staff. Among the staff of the IMF and the World Bank whom the authors would particularly like to thank are Tam Bayoumi, Adrienne Cheasty, Michael Deppler, Dimitri Demekas, Liam Ebrill, Bernard Funck, Paul Hilbers, Peter Keller, Russell Kincaid, Tim Lane, Jimmy McHugh, Roger Nord, Kyle Peters, Marc Quintyn, Roberto Rocha, Susan Schadler, Jerry Schiff, and Dimitri Tzanninis. The views expressed, however, are the sole responsibility of the authors, as are any remaining errors. The preparation of this book benefited greatly from the editorial advice of Jeremy Clift, from assistance provided by Indra Perera and Joy Rivera in preparing the text, and from the research assistance of Amber Hasan and David Maxwell. The focus of this work on the five central European economies—the Czech Republic, Hungary, Poland, the Slovak Republic, and Slovenia—complements earlier cross-country studies prepared by IMF staff on the transition economies. In no way should it be understood to represent a view of the staff about the relative readiness of particular candidate countries to accede to the European Union. Washington, March 2002