The formal step of entering the European Union by ten new members (eight countries of Central and Eastern Europe plus Cyprus and Malta) took place in May 2004. This happened after a lengthy period of negotiations in which the size of the group was determined and transitory arrangements in some sensitive areas were negotiated (such as in the area of free mobility of labour or in complying fully with the environmental acquis or in the terms of joining the Common Agricultural Policy). An important result of the negotiation process was that the new members would enter the European Union without any opt-out clause to join in due course the European Monetary Union (EMU) and would thus join the Eurozone on top of becoming full members of the European Union over the coming years. The process of EU integration of the new members was thus not completed with EU membership but important steps were still to follow, such as the ending of transitory arrangements, getting the same access to CAP funds as the old members, and joining the EMU.

Three of the papers in this issue deal directly or indirectly with the (economic) rationality of joining EMU or – to be more precise – the timing of EMU membership. While the new members are obliged to aim towards EMU membership in due course, the timing of such a membership is not prescribed and is left open to consultative decision-making by the new members. The papers by Borowski, Czogala and Cyzyzewski, on the one hand, and Artus, on the other hand, take opposite stances on this issue. Borowski et al. deal with the issue of ERM II (European Exchange Rate Mechanism) membership which has to precede EMU membership and which requires members to keep their exchange rates from moving outside a prescribed band and the fixing of a “central parity”. The ERM II requirement of keeping the exchange rate within this band is also linked to the EMU membership condition of maintaining a “stable exchange rate” relative to the Euro for two years prior to EMU membership, although the width of the band differs substantially under the two arrangements (in ERM II +/–15%, for EMU membership the band is not clearly determined but often interpreted to be +/–2.5%). Borowski et al. deal with the consequences of a possible misalignment of the central parity rate which might lead to a real exchange rate development causing unsustainable external disequilibria. They discuss this issue particularly in relation to features of the Polish labour market and whether such misalignment might further contribute towards a deteriorating unemployment situation. They emphasise that the Polish unemployment situation might remain critical even if the exchange rate is set at its “equilibrium level”, emphasising structural and institutional causes of the current labour market situation rather than exchange rate overvaluation.

Patrick Artus, on the other hand, in an interesting comparison with the Mexican situation, strongly advocates for the countries of Central and Eastern Europe (especially the larger ones) a protracted period of exchange rate flexibility and maintaining some degree of independence of monetary policy. The reasons for advocating this policy are the Balassa-Samuelson process, the likelihood of asymmetric shocks on countries which are still quite apart in their structural features such as those of Western and Central and Eastern Europe, and the threat of speculative crises in a fixed exchange rate regime. Artus also explores the issue of optimal exchange rate policy in the context of a small economy-big economy general equilibrium model and his analysis supports the preference for a flexible exchange rate regime for a small catching-up economy unless there is an over-riding preference for low inflation over growth.

The paper by Cihak and Holub deals with the related issue of price level and price structure convergence of catching-up economies. They use a panel framework to estimate the factors determining aggregate price level convergence and find that, in addition to the traditional Balassa-Samuelson factors such as the relative levels of productivity in the tradable vs. non-tradable sectors and the shares of these sectors, some additional variables are needed to explain the speed of price level convergence: one is the extent of government interference in the form of price regulations, taxes and subsidies, the other is the structure of trade which reflects the fact that the more advanced countries maintain a monopoly position in more advanced, high-value added products. This expresses itself in an additional terms-of-trade factor lowering the price level of tradable goods of the less developed countries. Cihak and Holub obtain significant results for the importance of these two additional factors. They also examine the interaction between price level and price structure convergence using detailed sectoral price data from the International Comparison project. Finally, they examine the compatibility of achieving price level and price structure convergence within the boundaries set by the Maastricht criteria for EMU membership and find that achieving the inflation target would require a siginificant share of sectoral/commodity price levels to fall in absolute terms.

Karoly Fazekas in his contribution explores the regional dimension which characterises the labour market situation in the new members/accession countries of the EU. Using a unique micro regional data set for Hungary, Fazekas explores the spatial pattern of job creation/job destruction and particularly the roles of foreign and domestic investment processes thereby. He finds growing polarisation of micro-regions over the period 1993-2002 and also a very high degree of rank stability in relation to employment and unemployment rates of such micro-regions. The spatial allocation of foreign-owned enterprises (FIEs) is much more strongly concentrated than that of domestic enterprises (DEs). As regards the factors determining the regional concentration of FIEs and DEs jobs it turns out that the geographic factor, i.e. the location near the Western/Austrian border is an extremely important explanatory variable for explaining FIEs spatial concentration; on the other hand, the level of education of the regional population is also a very important explanatory variable as is the industrial heritage or the evolution of industry’s share in the region’s employment structure. Hence, on the one hand, the evidence for the role of foreign direct investment in regional agglomeration in Hungary is very strong, on the other hand, the possibility of influencing spatial allocation patterns through educational policy also emerges clearly.

Havlik presents an overview of the processes of industrial restructuring and catching-up which have characterised the accession countries over the past decade. Since 1995 the countries of Central and Eastern Europe have gone through a dramatic process of productivity catching-up in manufacturing industry with the implication that output growth – which was considerable – went along with lob losses in industry. He finds that productivity catching-up was even larger in the technologically more sophisticated engineering branches than in industry as a whole. Relative labour unit cost developments by industry are the result of productivity and wage rate developments as well as exchange rate movements. There is some evidence of wage growth being somewhat higher in fast productivity growth industries but not sufficiently higher as not to turn labour unit cost advantages gradually in favour of the fast productivity growth (and hence more sophisticated) branches. This also explains their relative attractiveness for foreign investors. More recently it seems that currency appreciations have been an important driving force in the accession countries’ competitiveness.

The papers in this issue cover therefore a range of important topics related to the integration processes of the accession countries/new members with the European Union. They deal with exchange rate and monetary policy as regards the timing and approach towards EMU membership, they discuss the processes of price level and price structure adjustments and they analyse the difficult issue of regional labour market dynamics, the role of foreign direct investment therein as well as the productivity, cost and specialisation dynamics which is characterising the processes of integration of the accession countries into the enlarged European Union.

L. F. & M.-A. L.