Drifting Apart: Income Convergence in the Euro Area

IMF Blog, September 13, 2017

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The euro’s founding expectation that a single currency and liberalized capital flows would spur income convergence across member countries has not been realized for the original 12 founding members.
Income convergence narrowed in the decades leading up to the 1990s, but:
- Convergence “failed to decrease further in the first decade of the euro,” bringing convergence to a halt after the euro’s introduction in 1999.
- Since the crisis (post-2008), per capita income levels have diverged across the original 12, reversing earlier progress.
Newer euro members (those adopting the euro after 2002) experienced rapid catch-up between 1993–2015, with income differences decreasing until the crisis and changing little since.
Empirical indicator: analysis of the period 1993–2015 shows:
- For the original members, the convergence relationship (growth versus initial GDP per capita) is almost flat (very little convergence).
- Excluding fast-growing Ireland removes evidence of convergence among the original members.
- For post-2002 adopters, the convergence relationship is steeply downward-sloping, indicating substantial catch-up.

Poor productivity growth in lagging founding members is the main explanation for the lack of convergence:
- Greece, Portugal, and Spain—three of the four original members with the lowest GDP per capita in 1993—experienced disappointing economic growth relative to peers.
- Substantial capital inflows in the first decade of the euro often financed unsustainable credit booms in consumption and real estate rather than productivity-enhancing investment.
- Since the 1990s, total factor productivity growth has been consistently slower in these lagging countries than in euro-area peers and has experienced a more pronounced slowdown over time.
- A sharper fall in investment and employment since 2008 further contributed to post-crisis divergence.

IMF research cited argues that the single currency itself is not the primary cause of stalled convergence; the productivity slump is linked more to insufficient structural reforms at the national level.
The single market and deeper European-level integration (capital markets, energy, digital commerce) can help restart convergence, but national reforms are essential.

Focus national policies on raising productivity growth in lagging countries by:
- Making product markets more efficient.
- Making labor markets more efficient.
- Encouraging investment in more productive technologies.
Complementary European-level measures include deepening the single market in areas such as capital markets, energy, and digital commerce to support cross-border integration.
Reforms are increasingly imperative given “slipping productivity growth in Europe” and tougher global competition—echoing the founders’ recognition that members must enhance competitiveness and productivity to compensate for the loss of exchange-rate flexibility under a monetary union.

Original euro group referenced: the 12 founding members.
Key periods and ranges: 1993–2015; 1999 (currency introduction); the 1990s; the first decade of the euro; post-2008 crisis; after 2002 (new members); “Twenty-five years on” (referencing time since the euro’s founding context in the narrative).

Source: Drifting Apart: Income Convergence in the Euro Area (September 13, 2017) — By Jeffrey Franks and Hanni Schölermann

薄れゆくユーロ圏の所得収斂; ジェフリー・フランク　ハニ・シューラマン IMFブログ, 2017年9月12日掲載
- 薄れゆくユーロ圏の所得収斂; ジェフリー・フランク　ハニ・シューラマン IMFブログ, 2017年9月12日掲載 (Markdown version)
- 薄れゆくユーロ圏の所得収斂; ジェフリー・フランク　ハニ・シューラマン IMFブログ, 2017年9月12日掲載 (PDF)
La convergencia del ingreso en la zona del euro: Se agranda la brecha
- La convergencia del ingreso en la zona del euro: Se agranda la brecha (Markdown version)
- La convergencia del ingreso en la zona del euro: Se agranda la brecha (PDF)