This paper focuses on the business cycle experience of the accession countries. Aside from its intrinsic interest, a natural motivation for such an investigation can be derived from the prospect that these countries, shortly after acceding to EU, will be encouraged to qualify for participation in EMU. Actually, in joining the EU these countries acquire the “acquis communautaire” which, inter alia, obliges them to attempt to qualify for EMU participation. The formal criteria under which such participation will be enjoined are those provided by the Treaty of European Union (the Treaty of Maastricht). No accession country has been allowed an “opt-out” from the obligation to join if it meets the criteria, such as was negotiated by the UK, and by Denmark.
Optimal Currency Area (OCA) theory provides an alternative set of criteria which countries might do well to consider to obtain advice on the advisability and best timing of such a passage. According to the traditional statement of OCA (following the seminal paper of Mundell (1961), the dominant criteria are the extent of trade with the potential partner countries (trade is a positive indication for union) and the extent to which the experience of shocks is common (symmetric) or asymmetric (an asymmetry of shocks being a negative indication). A widely-used device for measuring the symmetry or asymmetry of shocks is a measure of the synchronicity of business cycle experience – hence the relevance of this paper to this decision. It is also in this light that the paper makes a comparison between the relative business cycle experience of the current enlargement countries and that in some of the late joiners in previous periods.
The analysis of the business cycle of the Accession countries is rendered difficult by the structural break that marks the transition from the centrally planned to a market economy regime, and by the fact that following recovery from the “transition recession” the accession countries followed a path of more or less uninterrupted and speedy economic development and growth. In the post-transition period locating the classical cycle, with its reference to an upper turning-point characterization defined in terms of an absolute subsequent decline in activity is thus not very rewarding, producing in general at most one cycle.
Because of the pervasive growth in the post-transition period, the deviation cycle (where the turning points are characterized by changes relative to trend ) represents a more promising and appropriate version of the business cycle. We detect this cycle by applying a band-pass filter based on two low-pass Hodrick-Prescott filters, and then apply dating rules (which incorporate minimum phase and cycle duration restrictions) to the data series so isolated, along the lines of Artis, Marcellino and Proietti (2002, AMP henceforth).
More cycles are revealed by the application of this method and we proceed to examine their synchronization by calculating cross-correlations and measures of concordance. We find that the degree of concordance within the group of accession countries is not as large as that in general between the existing EU countries (the Baltic countries constitute an exception). Between them and the Eurozone the indications of synchronization are generally low when GDP data are used. Interestingly, when industrial production data are used, these conclusions are slightly modified. Where the Baltic countries continue to form a within-group bloc of highly related economies (but now also involving the Czech Republic), when cross-correlation measures are used, it is evident that Hungary also has a high degree of synchronicity in its cyclical movements with the Eurozone and individual member countries. The concordance measure offers a more generous view of cyclical sympathy between a number of accession countries (all except Latvia and Lithuania) and the Eurozone, however - and the cyclical sympathy between some of these countries (Poland, Slovenia, Estonia, Hungary, the Czech Republic) and Germany is especially marked.
On the other hand, relative to the position obtaining for countries taking part in previous enlargements, the accession countries appear less convergent in (industrial production) business cycle terms with their prospective partners, with the exceptions of Poland, Slovenia and Hungary. Moreover, evaluating the dynamic behaviour of the correlation of industrial production between accession countries and the euro area, a downward trend is evident in the recent period for all countries except Poland and Hungary.
The structure of the paper is as follows. In Section 2 we discuss the available information set, which is quite limited temporally and of rather poor statistical quality. We use industrial production series rather than GDP, the former being available for longer time periods and at a higher (monthly) frequency, but with a marked (and changing) seasonal pattern, that requires a careful treatment before the cycle can be revealed. In Section 3 we review the business cycle dating algorithm proposed by AMP and discuss how to modify it to deal with the seasonal adjustment. In Section 4 we present the results for the classical and deviation cycle. In Section 5 we focus on the previous recent accession episodes, i.e., Greece, Spain and Portugal in the ‘80s and Austria, Finland and Sweden in the ‘90s. In Section 6 we summarize the established relevant features of business cycle experience in the Accession countries, and to conclude we revert to some of the Optimal Currency Area considerations in order to put our findings in perspective. The Appendix provides additional details on the dating algorithm.
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