How synchronized are central and east European economies with the Euro area?

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A high degree of cyclical synchronization between central and eastern European countries (CEECs) and the euro area is crucial for successful EMU enlargement. This paper explores comovements between CEECs and the euro area, establishing economic linkages through dynamic correlation and cohesion measures. Using a large-scale dynamic factor model, we identify key structural common euro-area shocks and examine their transmission to CEECs compared to current EMU members. A counterfactual experiment assesses the costs and benefits of EMU accession for individual CEECs regarding economic volatilities and synchronization implications. The results are mixed; dynamic business cycle and inflation correlations between CEECs and the euro area are generally lower than those among individual EMU members but higher than some small peripheral EMU countries. Variance shares of output and inflation explained by common euro-area factors support this finding. The propagation of euro-area shocks to CEECs does not significantly differ from that to EMU countries in most cases. Our counterfactual analysis shows no significant stabilizing or destabilizing effects from a common monetary policy and fixed exchange rates. However, business cycle synchronization between CEECs and the euro area is expected to increase, revealing considerable heterogeneity across CEECs. Consequently, for some countries, EMU accession may be more costly, with Poland, Slovenia,