The economic impact of EMU on the EFTA countries

Abstract

From all the non-EU member states, EFTA is the most closely integrated group with the EU. Now that the third and final stage of EMU is dose to completion, one can note a number of direct and indirect effects of this EU project on the four remaining members of EFTA. Norway, Iceland and Liechtenstein are members of the EEA Agreement, while Switzerland have developed a number of bilateral agreements to closely link their economy to the EU. With the: exception of Iceland's excessive inflation and long-term interest rate levels, all EFTA countries would pass the Maastricht Convergence Criteria tests based on recent figures. The strong Norwegian and Swiss economies, and the largely fisheries-dependent Icelandic economy have other reasons for not immediately joining the EU. All EFTA countries enjoy some economic benefits from EMU, while bearing some of the costs. The number of countries participating in EMU, affects considerably the magnitude of costs and benefits for EFTA countries. With Denmark, Sweden and the United Kingdom being among the major trading partners of Norway and Iceland, the decisions on EMU membership taken by these three EMU opt-outs are important in considering the possibility of EU membership. The study concludes that there are a number of option~ available for the EFTA countries with regards to exchange rate policy. Their current floating exchange rate regimes could alternatively change into closer ties to the euro, in the form of pegged exchange rates or outright euroisation. However, these options would rank lower than membership in EMU itself.