An empirical analysis of the patterns of growth and convergence in the European Union since the introduction of the single currency

Abstract

An Empirical Analysis of the Patterns of Growth and Convergence in the European Union after the introduction of the Single Currency The Convergence process that had characterized the history of the European economic integration started to reverse since the early stages of the project of monetary unification. In particular the process of economic convergence shifted from Southern European countries and regions to Eastern Europe. Therefore during the last two decades Eastern European countries and regions have been reducing the gap with the richer regions while the income and productivity gaps between the ¿Western¿ members of the EMU widened. This thesis has the general objective to empirically analyse and explain the evolution of the process of convergence in the European Union since the introduction of the single currency from different economic perspectives. Through the application of different econometrics techniques I will individuate three relevant economic ¿forces¿ that contributed to the emergence a bifurcated path of convergence in income per capita and labour productivity the European Union. The first ¿force¿ is directly linked to the adoption of the single currency that entailed too stringent fiscal rules for countries that opted to join the club. Some peripheral countries resulted particularly penalized by these fiscal rules that were also applied after 2008 in spite of the outbreak of the Global Financial crisis. The second ¿force¿ is related to the factor mobility that entailed a progressive relocation of the manufacturing industry within and around the richer core European regions. Factor mobility within the Common Market remarkably benefited Eastern European regions whose geographical position is more strategic for investment rate in manufacturing industry and increasing returns. Symmetrically the size of manufacturing industry shrank in most of the regions of the peripheral countries of the European Economic and Monetary Union. The third ¿force¿ is represented by the quality of government institutions. Western European regions with lower quality of government institutions are actually the regions that recorded the worst economic performances after the introduction of the Single Currency.