Economic Convergence in the Euro Area: Coming Together or Drifting Apart?
48 Pages Posted: 8 Feb 2018 Last revised: 18 Nov 2021
Date Written: January 2018
Abstract
We examine economic convergence among euro area countries on multiple dimensions. While there was nominal convergence of inflation and interest rates, real convergence of per capita income levels has not occurred among the original euro area members since the advent of the common currency. Income convergence stagnated in the early years of the common currency and has reversed in the wake of the global economic crisis. New euro area members, in contrast, have seen real income convergence. Business cycles became more synchronized, but the amplitude of those cycles diverged. Financial cycles showed a similar pattern: sychronizing more over time, but with divergent amplitudes. Income convergence requires reforms boosting productivity growth in lagging countries, while cyclical and financial convergence can be enhanced by measures to improve national and euro area fiscal policies, together with steps to deepen the single market.
Keywords: Business cycles, Economic integration, Euro Area, Financial cycles, Convergence, synchronization, Economic and Monetary Union, Optimum Currency Area, Financial Aspects of Economic Integration
JEL Classification: E32, F15, F36, O47
Suggested Citation: Suggested Citation