The formation of the EU and Economic and Monetary Union (EMU) was predicated on an increased convergence among member countries not only on economic but also on political grounds, in terms,for instance, of quality of institutions and respect of the rule of law. While it was obvious that the euro area did not satisfy the criteria for an optimal currency area at the time of introduction of the common currency, the expectation was that this problem would have been gradually solved. Increased economic convergence would have also made it easier to introduce institutional reforms to further strengthen the euro area and to make it possible to converge into a fully-fledged political union. The euro was to become the common currency of the EU. All EU countries, indeed, with the exception of Denmark and the UK, had committed to eventually adopting the euro.
Observing the situation almost 20 years after the first decision concerning the adoption of the euro (1999) and almost 15 years after the decision concerning the Eastern enlargement (2004), it is tempting to conclude that European policymakers could have not been more wrong. Economic convergence, as measured for example in terms of GDP per capita, reverted to strong divergence in the euro area after the outbreak of the economic crisis. Economic convergence, instead, has increased strongly between Western and non-euro area Eastern European countries, but political models have diverged so much that for the first time in EU history a member country (Poland) is currently under judgement for violation of the rule of law.
This conclusion might be too hasty, though. The international economic crisis in 2008-09 and the subsequent euro crisis in 2011-13 represented an important breaking point in the evolution of the euro area. As a consequence, several countries in the ‘periphery’ had to undertake severe fiscal adjustments and structural reforms, in some cases in exchange for the financial support granted by the newly introduced European Stability Mechanism (ESM). The crisis revealed the existence of many pitfalls in the architecture of the EMU, which has also been reformed by making the first steps towards the introduction of a Banking and Capital Union and by strengthening fiscal and economic surveillance on member countries. In light of these developments, one could hope that the observed reduced convergence in terms of per capita GDP in the aftermath of the crisis might just be a temporary episode in an overall process of economic and institutional convergence.
Convergence and divergence in the euro area
To investigate these issues more in detail, it is not enough to look at currenteconomic performance. We need to consider the evolution of factors that might affect futureeconomic growth, such as the provision of services that determine the accumulation of human capital (health and education), the competitiveness of markets (civil justice, labour and product market regulations) and the quality of political and social institutions. If, despite the economic crisis, convergence continued across EMU countries with respect to these fundamental factors, economic convergence might also be expected to resume in the future.
To this end, in a recent paper we collect a vast array of comparable data from several sources concerning public services, product and labour markets regulation and quality of institutions in a sample of OECD countries over the period 1990-2016 (Bordignon et al. 2018). To guarantee higher homogeneity in terms of political and economic institutions, we include in our sample only the countries which joined the OECD before 1989 (with the exception of Turkey). This implies that our analysis focuses only on the early entrants in the EMU, namely, the 11 countries that joined the EMU in 1999 and Greece (whose entrance occurred in 2001).1 Considering a larger set of developed countries (rather than just those in the euro area) also allows us to test whether, during the international crisis, the countries that adopted the common currency implemented different policies with respect to the countries that were not part of the euro area.
Our analysis reports both good and bad news. We use standard measures of convergence (i.e. sigmaand betaconvergence)2 and document that even if after the beginning of the crisis EMU countries diverged in terms of expenditure on public services concerning human capital accumulation, the process of convergence in several output indicators did not halt (Christl et al. 2018). For instance, as Figure 13 shows, EMU countries converged in terms of quality of health care, as measured by the Healthcare Access and Quality indicator, or share of tertiary graduates in the population.
Figure 1 Sigma convergence in public services among EMU countries
As it concerns civil justice, competitiveness, efficiency, regulation of both labour and product markets and female participation in the labour market, we actually find strongevidence of convergenceafter the crisis. In line with the results of earlier studies regarding the pre-crisis period (e.g. Alesina et al. 2008, Nicoletti et al. 2003, ECB 2015), we find that after the crisis in backward countries there was a larger increase in female participation, markets were more deregulated, the number of procedures for civil trials fell more, and the general index of doing business improved more (see Figure 2).
Figure 2 Sigma convergence in economic regulation among EMU countries
Following Reinhart (2002), our econometric analysis exploits the credit rating downgrade operated by international agencies (e.g. S&P Global Ratings 2018) as a proxy for the timing and severity of the economic crisis in the period between 1990 and 2016. The use of downgrades to measure the economic situation of a country is also supported by the conclusions of recent analyses on the economic determinants of sovereign rate movements in the euro area (e.g. Brůha et al. 2017). The analysis further underpins the results reported above. For example, our estimates suggest that EMU countries hit by the crisis were more successful than other OECD countries hit by a similar crisis at implementing reforms that improved the efficiency and competitiveness of their economies, in particular as far as labour and product market regulation and civil justice indicators are concerned. Moreover, this was not just the consequence of ESM programmes, which seem to matter only for the adoption of policies aiming at the deregulation of the labour market.
The good news ends here, however. In spite of the above convergence, euro area countries strongly diverged in terms of citizens’ perceptions about quality of governance and corruption, trust in national institutions, as well as in the turnout at national elections (Dustmann et al. 2017). There is also evidence that income inequality and poverty levels, which were converging towards lower values in EMU countries before the crisis, diverged after 2008. Interestingly, the economic crisis accelerated a diverging tendency in citizens’ perceptions about trust and quality of government that was present even before 2008 (e.g. Alesina et al. 2017) in a number of periphery EMU countries such as Greece, Italy, Portugal, and Spain (see Figure 3).
Figure 3 Sigma convergence in governance, corruption and trust among EMU countries
