Integration of Bulgaria and Romania to The European Union

This paper examines the long-term financial integration of second-round acceding countries’ with the European Union equity markets during the Accession Process. The low pairwise correlations between these markets imply portfolio diversification opportunities, yet correlation is a short-term measure. The long-term stock market interdependence is analyzed with Johansen (1991) cointegration approach, which suggests non-cointegration across the second-round countries on bivariate as well as on multivariate settings with the EU. This finding is further confirmed with the Engle-Granger (1987) causality test which presents no evidence of a casual flow from EU to these markets. The results indicate that the completion of accession negotiations with Bulgaria and Romania have not yet resulted in the complete financial integration of these markets with the European Union. They still offer significant long-term diversification opportunities for the international investors. The objective of this research is to investigate if the fulfillment of Copenhagen economic criteria and increased trade linkages during the accession period towards the Maastricht criteria have resulted in the stock market integration of second-round countries with the European Union. The EU Enlargement entails three main criteria to be fulfilled by the acceding and candidate countries; political, economical and adoption of the Community Acquis. The Copenhagen economic criteria oblige these countries to have a viable market economy, apply reform programs to obtain capacity to cope with market forces and competitive pressures within the Union and ability to take on the obligations of membership including Economic and Monetary Union (EMU). Thus, these countries have to adjust their monetary and fiscal policies to adopt to EMU nominal convergence criteria in the areas of inflation, long term interest rates, exchange rate stability and GDP deficits defined in Maastricht Treaty. Accordingly, their economies become more and more connected with the EU member states. Furthermore, accession to EMU demands new member states to have closer trade links with the EU-15 or with the current Eurozone, including the intra-industry trade, synchronization of business cycles, actual exchange rate variability and actual factor mobility between the new and old members.