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Real convergence in the euro area: a long-term perspective

Juan Luis Diaz del Hoyo, Ettore Dorrucci, Frigyes Ferdinand Heinz and Sona Muzikarova

No 203, Occasional Paper Series from European Central Bank

Abstract: In the euro area, there is mixed evidence that the GDP per capita of lower-income economies has been catching up with that of higher-income economies since the start of monetary union. The significant real convergence performance of some of the most recent members contrasts with that of the economies of southern Europe, which have not met expectations. However, attributing all the blame for this outcome to the introduction of the single currency simply misses the point. By taking a “long view” and reviewing the evidence since the 1960s, this paper shows that certain member countries began to face a “non-convergence trap” long before the euro years. We also provide stylised facts on: (i) the central role of total factor productivity in driving real convergence in the euro area over time, alongside other factors; and (ii) the crucial interaction of real convergence with “Maastricht convergence” and institutional quality, the other two key components of sustainable economic convergence. We conclude that it is critical that the euro area countries facing convergence challenges enhance the resilience of their economic structures by improving the relevant institutions and governance. JEL Classification: E01, F15, J11, O11, O43, O47, O52, O57

Keywords: Five Presidents’ Report; GDP per capita; institutional quality; labour productivity; Maastricht convergence criteria; nominal convergence; real convergence; Reflection Paper on the Deepening of EMU; sustainable economic convergence; total factor productivity (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec
Date: 2017-12
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