European convergence process – cluster analysis

In this paper we review the European monetary integration process of the last decade using cluster analysis. The paper is based on the identification of changes in defined clusters, which may indicate potential convergent or divergent tendencies in the European Monetary Union. These trends allow us to find out if the core of the European Monetary Union has stable or unstable composition during the analysed period. At first, in order to perform the cluster analysis the convergence criteria are identified. These criteria are openness of the economy, long-term interest rates, GDP in purchasing power parity per capita, out-put gap, flexibility of the labour force and Harmonized Index of Consumer Prices (HICP) inflation. Second, based on these criteria, we conduct an analysis of selected years that are most significant for European integration. We focus on differences between the periods before and after the crisis. Our cluster analysis uses Ward`s clustering method, which has the most interpretable results. The methodology of this paper is similar to Artis and Zhang`s (1997) who focused on world integration and Boreiko`s (2003), who also focused on European monetary integration. We use results from the paper by Tsangarides and Qureshi (2008) who reviewed sustainability of fixed exchange rates in Western Africa and from paper by Crowley (2013) who reviewed the degree of the European monetary integration. The application of cluster analysis to conditions in the European Union allows us to draw conclusions such as, whether the transitional economies do belong to the core of the European Monetary Union.