Given the aim of attaining real convergence over time, accession countries will have to devote significant public resources to funding investment. However, candidate countries’ weighted average public deficit amount to 3.6% of GDP in 2001. The fiscal consolidation currently planned by some accession countries is welcome and likely to require sizeable expenditure cuts or tax increases. Looking ahead, accession countries will have to implement fiscal consolidation very credibly with a view to avoiding the risks associated with the existence of high “twin deficits”, i.e. fiscal and external. –  Fourthly, a sound and efficient banking and financial system is key. Significant progress has been made over the past few years in rehabilitating the banking sector and encouraging foreign ownership. The latter has also contributed to greater integration into the EU financial system. Nevertheless, adapting the legal and regulatory framework is a process entirely in the hands of the accessing countries. The intermediation role of the banking sector remains fundamental for the efficient use of capital and sustained growth. Progress in corporate governance, the enhancement of the legal and supervisory frameworks that support the banking sector, and an efficient fight against money laundering, are also crucial. These improvements are conducive to achieving the macroeconomic objectives of the accession countries. –  Fifthly, central bank independence is of the essence. It is an integral part of the acquis communautaire, which is laid down not only in national legislation but above all in the Maastricht Treaty.
For today’s purposes shocks are new, unanticipated developments which are clearly distinguishable from more routine developments. As an MPC member I want to try and bring out how I’ve been thinking about each shock in terms of the impact on demand or supply in the economy and the time frame over which these impacts persist. Demand being what we actually observe in terms of output, income and expenditure. Supply being more about the capacity of the economy. In terms of inflation, if a shock pushes up demand relative to supply then inflationary pressures are likely to build. Similarly if an unanticipated development pushes up supply relative to demand then inflationary pressures will subside. Back in February I focused on Brexit, the coronavirus pandemic and energy prices as three major shocks which were working through the economy. Today I want to cover four developments since then: the Russian invasion of Ukraine, the fall in UK labour market participation, UK fiscal policy and financial market turbulence. All four of these shocks matter to differing degrees to the economic outlook and to our policy response. Four shocks My February speech was two days before Russia began its illegal invasion of Ukraine. Today is Day 225 of the ensuing war and over that period global energy prices (as well as food and other prices) have risen further and also been highly volatile, particularly in the case of wholesale gas prices.