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Ms. Susan M Schadler

Accession to the EU and conforming to the acquis communautaire will result in a marked convergence of the CECs’ legal, administrative, and infrastructural attributes to those of the EU. But the quite different economic histories of the two groups leave substantial gaps in fundamental economic characteristics that will shape the CECs’ experience within or outside the euro area for some time to come. Because these will be fundamental to the analysis throughout this study, this section identifies some defining characteristics of the CECs that will influence

Ms. Susan M Schadler and Mr. Pipat Luengnaruemitchai
In the past several years, the ten new Central and Eastern European members of the European Union have enjoyed rapid growth but frequently alongside growing external imbalances. Economists have pointed to rising vulnerabilities, but markets compressed sovereign bond yields. This paper examines the evidence from the perspective of economists' vulnerability analysis and markets' pricing of sovereign bonds. It finds that spread are lower than can be explained by "fundamentals" and speculates on the causes and permanence of this yield compression.
Ms. Susan M Schadler and Mr. Pipat Luengnaruemitchai

I. I ntroduction In the past several years, many of the ten Central and Eastern European countries (CECs) that acceded to the European Union during 2004-07 have been among the most successful emerging market countries in the world. 2 Financial markets have been correspondingly impressed and generous toward them. At the same time, some economists, employing standard vulnerability indicators, have raised questions about whether the strong economic performance of the CECs would be robust to global financial market disturbances or whether deteriorating

Ms. Susan M Schadler and Mr. Pipat Luengnaruemitchai

Front Matter Page European Department Authorized for distribution by Susan Schadler Contents I. Introduction II. Macroeconomic performance and vulnerabilities III. Measuring the CEC Advantage: What fundamentals cannot explain A. Methodology B. Data C. Estimation IV. Results V. Conclusions References Appendix Theoretical Motivation Total Credit Rating-Outlook Index (CROI) Tables 1. Baseline Regression Results 2. Robustness Checks Figures 1. Growth of Real GDP per Capita, 2001-07 2. Average CPI Inflation 3

Mr. Peter Doyle, Mr. Guorong Jiang, and Louis Kuijs

For transition countries in the process of joining the EU, the prospects for the real sector will be critical in determining the appropriate policy frameworks both before and after accession. This chapter discusses the key factors likely to shape the nature and pace of growth in five of these countries in central and eastern Europe that form the focus of this book: Poland, the Czech Republic, the Slovak Republic, Hungary, and Slovenia—known collectively as the CEC5. The discussion is based on the standard growth accounting framework that decomposes growth

Ms. Susan M Schadler

costs of possible errors. More specifically to the CECs, capital account volatility will remain a serious challenge throughout the process of preparing to adopt the euro. In fact, the analysis in this section suggests that the very process of adopting the euro could expose countries to additional sources of volatility. Finally, current low levels of bank credit to the private sector relative to GDP in each of the CECs raise the specter of rapid credit growth that could feed overheating and asset price bubbles. Countries will, therefore, need plans for how to deal with