Convergence in the Eurozone: Progress Towards the Goal?

Abstract

Convergence in per capita income across member countries is a stated goal of the European Union. This goal applies, of course, to all eurozone nations. The impact of a common currency on income convergence is both theoretically and empirically ambiguous, however. Previous studies on European convergence have suffered from methodological problems. In this paper, we utilize the pair‐wise approach of Pesaran. We use, among other tests, the RALS‐LM technique which allows for endogenous breaks. This will yield greater power, as well as shed light on economic changes, such as the advent of the euro, which may have promoted or hindered convergence. Results indicate little evidence of convergence within the eurozone. Moreover, convergence is more often found between euro and non‐euro countries than within the euro itself, suggesting the common currency had at best a neutral, or even negative impact on income convergence.