Economic convergence in Europe

11 June 2014

wiiw draws conclusions from a biannual collaborative research endeavour on growth, cohesion and structural change in the process of CEE transition and EU membership.

wiiw is one of 12 partners in the FP7 project GRINCOH, which stands for Growth-Innovation-Competitiveness: Fostering Cohesion in Central and Eastern Europe. As coordinator of Work Package 1, which focuses on economic development patterns and structural change in the process of transition and EU membership, wiiw has summarized and synthesized the main research findings.

A major objective of Work Package 1 was to empirically assess the process of economic convergence in Europe – both, in the New Member States as well as in the EU as a whole – throughout the period before, but especially after the EU accession, and after the recent crisis.

Although the heterogeneity of growth performance between the EU-17 economies and the NMS, as well as among individual countries of these subgroups (e.g. Hungary, Baltics, southern Europe versus North, etc.) is considerable and sometimes even increasing, some major economic trends could be identified.

As for the new EU Member States of Central and Eastern Europe, the absolute real convergence between the NMS and the remaining EU countries has continued (on average) without interruption before and during the crisis, albeit at a reduced speed in the latter period and against the backdrop of a major downward shift in GDP growth rates across the whole EU. The NMS economies were converging to the more developed EU Member States in many important structural aspects such as labour productivity, competitiveness, export performance, etc. At the same time, the NMS have also mobilized considerable resources in their catching-up process. In relative terms (as a percentage of GDP), NMS economies attracted more FDI and more foreign savings in general than EU-17 economies and had higher fixed investment shares in GDP. However, there is no unequivocal and straightforward conclusion regarding the convergence of individual NMS during the transition and EU membership periods. In fact, the empirical evidence suggests that economic growth in the NMS was to a larger degree related to improvements in structural supply-side factors than this was the case in EU-17 economies.

Prior to the crisis, the integration model of growth was not much different in the NMS and the EU-17. However, the dismal economic performance of the EU countries in the crisis period 2008-2011 suggests a complete collapse of the growth model that prevailed before. This collapse may lead to additional arguments for critics of the so-called “integration” growth model, being accompanied by excessive liberalization of capital flows, lack of industrial policies, etc.

The key question for the NMS therefore is how to re-shape the model of growth, apart from what needs to be done at the EU level. Obviously, the NMS economies need to put behind them the model of credit and debt-intensive growth that they enjoyed during the past decade prior to the crisis. This model has proved both ineffective and highly risky. Besides, financial markets are not likely to engage as partners in such a model any longer. Policy measures should address further advances in competitiveness (as reflected in unit labour costs) and in fostering innovation (supported by FDI inflows to the tradable sector), two factors that did contribute to higher growth in some of these countries and are likely to continue to have such an effect, if conditions are in place.

Overall, we conclude that real convergence with the EU will continue as a fundamental long-term economic trend, albeit with considerable differences among individual countries and probably at a lesser speed than before the crisis. It is therefore worth the effort to search for and pursue policies seeking to invigorate growth in Europe.