Catching-up processes in the euro area

Narcissa Balta

Quarterly Report on the Euro Area (QREA), 2013, vol. 12, issue 1, 7-18

Abstract: Convergence forces are generally contributing to a narrowing of the income gaps between EU Member States through faster growth in catching-up economies. In the euro area, however, the convergence process appears to have stalled a few years after the inception of the euro. This essentially reflects a poor growth performance of catching countries, which can in turn be traced back to disappointing productivity and TFP growth. Catching-up processes in the euro area were not hampered by insufficient capital, as converging economies benefited from large inflows of foreign capital in pre-crisis years. However, the observed capital accumulation pattern does not seem to have been conducive to rapid technological change and productivity growth. There is also evidence of capital misallocation, with the accumulation process becoming gradually less economically efficient during the first decade of the euro. Sectoral data show that, in most of the catching up economies, investment was high in all sectors during the pre-crisis period, but relatively more so in the non-tradable/services industries than in the manufacturing sector. While, in the very early years of the euro, investment tended to be allocated to sectors with a high productivity of capital, high profit mark-ups emerge as main drivers of investment accumulation in later years. This shift in drivers was associated with large capital flows into low productivity industries of the non-tradable/services sectors and could be suggestive of an accumulation process driven more by rent seeking than by efficiency considerations. The weakness in productivity in the catching-up countries has been broad-based, affecting all economic sectors. It cannot be explained by human capital differences, as the skill structure improved over the last decade in the countries concerned. Although further analytical work is needed to better understand the drivers of TFP, insufficient investment in ICT and imperfect framework conditions in terms of competition and barriers to entry could be important explanations for the disappointing TFP performance.

Keywords: economic; convergence (search for similar items in EconPapers)
Date: 2013
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