Real Convergence Across the Euro Area
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DOI: 10.1007/s10272-020-0920-2
Leonor Coutinho and Alessandro Turrini*
Real Convergence Across the Euro Area What Role Do Macroeconomic Imbalances Play? This paper studies the relationship between real convergence in the euro area and macroeconomic imbalances. It compares the main features of convergence within the euro area with other EU and non-EU country groups, looking at both ‘sigma’ and ‘beta’ convergence in output and total factor productivity. Expected convergence paths for euro area countries are estimated using growth regressions run on a large panel of advanced and emerging market economies and compared to actual growth. The findings support the view that EU and euro area countries display similar convergence patterns to those of other country groups, while the group of countries that adopted the euro first exhibit relatively weak convergence since before the financial crisis. Such differences could be partly linked to relatively low dispersion in per capita incomes across this country group, although lack of convergence is also largely due to persisting differences in total factor productivity performance. The findings also suggest that macroeconomic imbalances accumulated in the pre-crisis period such as high private and government debt and strong growth in the non-tradable sector have been associated with lower convergence, particularly for euro area countries.
In the run-up to the Economic and Monetary Union (EMU), the Maastricht criteria emphasised nominal convergence as a requirement for achieving a stable common currency, with the entry criteria requiring convergence in nominal variables including inflation, interest and exchange rates, public deficits and debts. At the same time, the academic debate was largely focused on the desirable characteris© The Author(s) 2020. Open Access: This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (https://creativecommons.org/licenses/by/4.0/). Open Access funding provided by ZBW – Leibniz Information Centre for Economics. *
The authors thank the participants of the European Central Bank Surveillance Workshop in Frankfurt on 19 October 2017, and in particular David Sondermann, for useful comments and suggestions. We also thank Marco Buti and José Leandro for useful comments on an earlier version of the paper. All remaining mistakes are the authors‘ solely. The views expressed in this paper are those of the authors and should not be attributed to the European Commission.
Leonor Coutinho, European Commission, Brussels, Belgium. Alessandro Turrini, European Commission, Brussels, Belgium.
ZBW – Leibniz Information Centre for Economics
tics of countries sharing a common currency. In line with the optimal currency area (OCA) theory (Mundell, 1961), countries ought to be sufficiently similar and integrated to reduce the likelihood of asymmetric shocks and have flexible product and labour markets to lower the costs of adjusting in the absence of nominal exchange rates. In this respect, the academic debate in the p
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