Table 1.1 Mean GDP growth rates (%) Figure 1.1 Current account balance (%of GDP) for eurozone members 1992-2013 Source: IMF (2012). Consequently, to avoid making a potentially costly mistake, there is an obvious need for a series of measurements to determine whether an indi- vidual economy is prepared for the demands of eurozone membership (EC Commission, 1992). Hence, in terms of rules this is through the identifica- tion of those EU member states that have demonstrated their suitability for euro membership by their attainment of the five TEU convergence criteria Table 6.1 Fiscal positions in year of entering the eurozone whereby each country’s rate of inflation must be no more than 1.5% above the average of the lowest three inflation rates in the EMS; its long-term interest rates must be within 2% of the same three countries chosen for the previous condition; it must have been a member of the narrow band of fluctuation of the ERM for at least two years without a realignment; its budget deficit must not be regarded as ‘excessive’ by the European Council, ‘excessive’ being defined as deficits greater than 3% of GDP for reasons other than those of a ‘temporary’ or ‘exceptional’ nature; its national debt must not be ‘excessive’, defined as above 60% of GDP and not declining at a ‘satisfactory’pace. The initial two criteria - each country’s rate of inflation must be no more than 1.5% above the average of the lowest three infla- tion rates in the EMS, and its long-term interest rates must be within 2% of the same three countries chosen for the previous condition — have a clear rationale upon the achievement of prior cyclical convergence. The similarity of inflation rates denotes a low probability of a sudden loss of competitive- ness inside a single currency that might lead to unemployment blackspots and a growing inequality. Moreover, comparable interest rates indicate a relatively straightforward transition to a common monetary policy that does not require dramatic changes in the formally pursued national strate- gies. However, whilst these two convergence criteria are theoretically sound, the latter three have generated both analytical and empirical controversy, wahys lott hvetr colo vanren bevwserrradsrst end Tine Fm: Eoae Croat Daoraccinwn +c arial l<: *Greek sub-periods are 1992-2001, and 2001-2008, since Greece achieved membership in 2001. Table 6.2 Percentage-point change in public debt (1981-2008) not declining at a ‘satisfactory’ pace - as a means to establish compatibility raises further problems. The justifications for their use are that they would result in a stable debt ratio in a steady-state economy with 2% inflation and 3% real growth (Trades Union Congress, 1993); and advocacy of the ‘golden rule’ that current government expenditure and revenue should be equated, together with an estimate that EU public investment approximately aver- aged 3% over the period 1974-1991 (Buiter et al., 1993). However, this fails to provide a convincing case, since the fiscal reference values are compatible with any combination of inflation and growth, which sum to 5% per annum. The 60% national debt criterion is of doubtful use because it is primarily a consequence of the prior accretion of debt, reflecting past fiscal activities rather than current policy (Goodhart, 1992). Moreover, there is no evidence that attainment of these criteria would result in a steady-state economy (Arestis and Sawyer, 1996). In contrast, the TEU contained no similar tests to compare the wealth of the different countries, their unemployment, produc- tivity and growth rates, nor the sectoral composition of economic activity. Despite the problematic nature of the convergence criteria, the architects of the eurozone believed that their attainment would indicate the compatibility of potential participants, together with providing a guide to their subsequent maintenance (Baimbridge, 1997), where the prerequisite of prior convergence is significant over each stage of the economic cycle, and to prove robust against shocks (Eichengreen, 1992a, b; Bayoumi and Eichengreen, 1993). However, for the period between the TEU and advent of euro notes and coins, er ee 7 ae SS ae Sources: Adapted from Grilli et al. (1991) and EC Commission (1991). Table 7.1 Political independence of central banks! Table 7.3 Comparison of central bank independence of EU member states and the ECB ECB indices from those of the EU member states’ central banks. This proce- dure clearly identifies the German Bundesbank as providing the blueprint for the ECB with no required revisions to its independence characteristics. The central bank of the Netherlands is the only other to fall below the overall mean comparison figure of six, whilst Denmark and Ireland coincide with the average. In contrast, those NCBs requiring the largest institutional reforms to Sources: Adapted from Grilli et al. (1991) and EC Commission (1991). Table 7.2 Economic independence of central banks? Figure 8.1 Economic policymaking within the eurozone fluctuations. To achieve this, the central bank will choose the interest rate to influence the output gap, as it seeks to achieve stabilisation of the economy; however, it cannot bring about instantaneous change in output; rather, it takes time for interest rate changes to affect firms/households and output. To represent this policymaking, the NCM derives a monetary rule (MR) equation from the central bank’s output-inflation trade-off, which shows the combination of output and inflation that the central bank will choose given the Phillips Curve it faces. In particular, the MP equation looks at how the monetary authority sets the level of interest rate in relation to its policy goal (i.e., price stability/inflation targeting). In NCM, the interest rate is the policy instrument the central bank can use explicitly to control the inflation and output; moreover, it also indicates the replacement of LM by MR curve since the money supply is endogenously determined (Romer, 2000). The most famous and widely accepted monetary rule (interest policy rule) is the Taylor Rule, which proposes the monetary authority should respond to changes in both price and aggregate demand in order to maintain the price stability or to achieve the target inflation (Taylor, 1999). In other words, the central bank needs to change the interest rate if inflation deviates from its target or positive output appears in the economy (see Figure 8.2). In particular, this emphasises that a decision taken today by the central bank to react to a shock will only affect the inflation rate two periods later (m2), such that the central bank must forecast a further period ahead in the double-lag model to locate the appropriate Phillips Curve and optimal interest rate choice today. There may, however, be problems for the central bank when seeking to use an interest rate rule to stabilise the economy. Investment or other components of aggregate demand fail to respond (or to respond sufficiently) able 12.1 Comparison between features of Post-Keynesianism and the eurozone Source: Baimbridge et al. (2007).