Convergence in Per Capita Income Levels, Productivity Dynamics and Real Exchange Rates in the EU Acceding Countries

Abstract

During a catch up process – such as the one that thecountries acceding to the EU are undergoing – there emergesa fundamental economic link between nominal and realvariables which surfaces in the dynamics of the realexchange rate (the ``Balassa–Samuelson effect''). Thisarticle analyzes some of the implications of this process forthe acceding countries addressing three main issues.First it focuses on the empirical measurement of convergencebetween acceding countries and EU-member states. Thenit analyzes the economic fundamentals of a catch up processarguing that for this process to be self-sustained, it must bebased on differential productivity growth whereby productivityin the acceding countries grows faster than that in the incumbents.Thirdly, an attempt is made to test empirically theBalassa–Samuelson effect in the EU acceding countries. Finally the article discusses some of the policy implications of thedichotomy ``real-cum-nominal convergence'' on the way to EUand EMU accession.