Aspects of divergence in the Euro Area

Abstract

The paper examines how the convergence process between the less and the more developed members of the Euro Area weakened significantly after the circulation of the common currency, and subsequently reversed course in the postcrisis recession. The front-loaded consolidation programs that followed the bailouts in the over-indebted economies caused asymmetric losses in per capita income in the peripheral countries and led to further North-South polarization. The paper identifies public indebtedness, quality of institutions and capital formation as the areas where divergences are more pronounced and suggests that policy initiatives to encourage more investment and a faster institutional assimilation are needed for the convergence process in the Euro Area to take off again.