Divergent paths, convergent destinations: Analyzing the economic integration of non-euro countries with the euro area

Abstract

The European sovereign debt crisis of the past decade has rekindled the researchers’ interest in exploring the integration of non-Euro countries with the Euro Area. The Euroscepticism that followed the crisis has led to only 4 new members in the Eurozone since the early 2010s. For this reason, this study examines the integration of 8 non-Euro countries with the Euro Area and the existence of a leverage effect. These countries, in alphabetical order, are Croatia, Czechia1, Hungary, Poland, Romania, Sweden, Switzerland, and the UK. This approach to this subject results in an ECM-TGARCH model. The data employed are daily, excluding weekends and bank holidays, nominal exchange rates expressed versus the dollar ranging from January 1st, 2002, to December 31st, 2022. The empirical findings of the study indicate that Czechia, Poland, and Switzerland could join the Eurozone, whereas Hungary, Romania, Sweden, and the UK could not. Croatia, the most recent Eurozone member, has only become integrated with the Euro Area after 2018 when it was actively trying to fulfill the convergence criteria. As for the volatility asymmetry, it was only present in the case of Switzerland. With several non-Euro, EU nations remaining to adopt the euro, it is worth examining the reasons why they are skeptical and address potential issues that jeopardize the unity of the Eurozone.