Determinants of economic growth in the European Union. An empirical analysis of conditional convergence

Abstract

Being established from the initiative of six visionary countries in the second half of the 20th century, the European Economic Community has shifted the history of the European continent by promoting economic collaboration and political stability. Given its initial success, the regional group has quickly evolved from customs union to Economic and Monetary Union, comprising nowadays twenty-seven European countries. Although the European Union has successfully managed political, economic, social and even sanitary turmoil, the stability of the European architecture continues to be threatened by the heterogeneity of its members. In this respect, one of the main challenges for the European Union in its current composition aims the convergence of the economic performance between countries and regions. The purpose of this paper is to study the economic growth patterns in the European Union during 2000 and 2019, also conducting a comparative analysis between New and Old Member States. In order to capture the European economic landscape, the methodology was based on conditional β-convergence and the estimates were conducted by using ordinary least squares and generalized least squares with fixed effects. We have tried to find the relationship between the lagged value of GDP per capita and the subsequent growth rates, but also to study the influence of macroeconomic and social-related variables. By estimating regressions based on panel data, we have found evidence in favor of income convergence in the European Union, based on the inverse relationship between the lagged value of GDP per capita and the annual growth rates. Moreover, the comparative analysis between the New and Old Members illustrated that convergence was stronger in the latter group, given the sound macroeconomic and social environment. The empirical analysis suggested that the economic growth process both at aggregate and subgroup level was enhanced by investment, exports of goods and services, sound public finances and the increase of percentage of population with tertiary education. Consequently, in order to increase the cohesion between Members and to avoid separatist movements, the European decision-makers should strengthen the macroeconomic and social frameworks, maintaining a sustainable economic growth trajectory for both the New Members from Central and Eastern Europe and the Old Member States.