The evolution of economic convergence in the European Union

Abstract

This paper investigates per capita real income convergence in the European Union (EU) within a non-linear latent factor framework. We establish a set of novel stylized facts on economic convergence between 1970 and 2010 in light of the institutional changes and macroeconomic adjustment processes undertaken over the last 40 years. Our findings suggest no overall income convergence in the EU, however, we identify convergence clubs using an iterative testing procedure. The clubs are formed mainly on the basis of geographic region, and clustering is not necessarily related to EMU membership. The empirical evidence suggests a clear separation between the new and old EU member states in the long run, and we observe a division along the South-East vs. North-West dimension since the 1990s.