Eurozone Economic Integration: Historical Developments and New Challenges Ahead

Fabio Bagliano and Claudio Morana

No 546, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: The paper yields a structural account of economic integration in the Eurozone from its inception to post-pandemic developments by considering a broad range of convergence measures. We introduce a novel FAVAR framework, extracting the structural shocks driving the Eurozone business and financial cycles directly from the cyclical components they generate. Productivity advancements have been the critical trend convergence factor, shaping long swings in real, labor market, and financial dispersion. Subdued cost-push shocks were the key driver of Eurozone nominal and competitiveness convergence throughout 2015 but have become an all-rounded divergence force since then. Fiscal discipline imposed by the Stability and Growth Pact (SGP) increased real and financial divergence during all recessionary episodes, while the ECB expansionary monetary policy was a convergence factor. The SGP suspension during the recent pandemic recession and recovery has partially counteracted divergence pressures. Looking forward, convergence will crucially depend on how productivity dynamics and economic growth will fend off further unfavorable cost-push developments, which might become pervasive in a deglobalization-driven new macroeconomic regime.

Keywords: real, nominal and financial convergence and divergence; Eurozone; economic integration; recessions; financial crises; subprime financial crisis; sovereign debt crisis; pandemic recession; FAVAR models. (search for similar items in EconPapers)
JEL-codes: C32 E30 E50 (search for similar items in EconPapers)
Pages: 87
Date: 2024-10
New Economics Papers: this item is included in nep-eec
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Related works:
Working Paper: Eurozone Economic Integration: Historical Developments and New Challenges Ahead (2024)
Working Paper: Eurozone Economic Integration: Historical Developments and New Challenges Ahead (2024)
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