The anticipated effects of EU enlargement: exchange rate volatility, institutions and conditional convergence

Improvement (and reduced heterogeneity) of economic policies and institutions and reduced exchange rate volatility are two expected effects arising when candidates develop prerequisites needed to qualify for EU membership. In this paper we evaluate whether these two effects apply to Eastern European countries by inspecting the volatility of real effective exchange rates (REER) and of different indicators of quality of institutional rules and macroeconomic policies before and after the negotiation period. We finally evaluate the impact of both effects on levels and growth of real per capita GDP. By comparing dynamics of the above mentioned variables for transition candidates and a group of control countries, including transition non candidates, we find that the positive effects of accession to the EU materialise much before accession and even before the beginning of the negotiating process with significant effects on levels and growth.