Convergence and Heterogeneity in Euro Based Economies: Stability and Dynamics

Jonathan Haynes,Philip Haynes

doi:10.3390/economies4030016

Abstract

Cluster analysis is used to explore the performance of key macroeconomic variables in European countries that share the euro, from the inception of the currency in 2002 through to 2013. An original applied statistical approach searches for a pattern synthesis across a matrix of macroeconomic data to examine if there is evidence for country clusters and whether there is convergence of the cluster patterns over time. A number of different clusters appear and these change over time as the economies of the member states dynamically interact. This includes some new countries joining the currency during the period of examination. As found in previous research, Southern European countries tend to remain separate from other countries. The new methods used, however, add to an understanding of some differences between Southern European countries, in addition to replicating their broad similarities. Hypotheses are formed about the country clusters existing in 2002, 2006 and 2013, at key points in time of the euro integration process. These hypotheses are tested using the rigour of a bivariate analysis and the multivariate method of Qualitative Comparative Analysis (QCA). The results confirm the hypotheses of cluster memberships in all three periods. The confirmation analysis provides evidence about which variables are most influencing cluster memberships at each time point. In 2002 and 2006, differences between countries are influenced by their different Harmonised Index of Consumer Prices (HICP) and labour productivity scores. In 2013, after the crisis, there is a noticeable change. Long term interest rates and gross government debt become key determinants of differences, in addition to the continuing influence of labour productivity. The paper concludes that in the last decade the convergence of countries sharing the euro has been limited, by the joining of new countries and the circumstances of the global economic crisis. The financial crisis has driven divergences from pre-existing integration. Country convergence needs to be understood as a dynamic and multivariate concept. This is a significant development of convergence theory and is an addition to how the concept has been understood previously.

Highlights

This paper considers methods for researching economic convergence in the European Union (EU)
1 shows resultsof ofthe theeuro cluster analysis the first time period, 2002,the using the twelve countries were the members at this point.for
The research in this paper illustrates that there are important differences in the detail of how Southern European countries have evolved inside the euro area

Summary

Introduction

This paper considers methods for researching economic convergence in the European Union (EU). It argues that there have been limitations with these approaches, including their tendency to focus on one dependent variable as the main measure of convergence. Qualitative Comparative Analysis (QCA) is used to explain the clustering in the final model developed for 2013. It has been argued since the financial crisis that the original European economic convergence policy was too focused on controlling price inflation and government debt without enough wider consideration of other important economic goals. This research, examines both the original convergence criteria and additional macroeconomic variables concerning the wider business and market environment

Methods

Results

Discussion

Conclusion