An empirical analysis of income convergence in the European Union

Abstract

In this article, we investigate the convergence process within the European Union. More particularly, we study the convergence process of the new entrants from Central and Eastern Europe and of the 15 Western countries between 1990 and 2007. Applying a panel approach to the convergence equation derived from the Solow model, we show that new entrants and former members of the European Union can be seen as belonging to different groups of convergence. The existence of heterogeneity in the European Union or the Eurozone might affect their stability as the recent Greece's sovereign debt crisis illustrates it.

Keywords:

• income convergence
• European Union
• heterogeneity
• panel approach

JEL Classification:

• O40
• O52
• O57

Acknowledgement

We are grateful to Lionel Artige, Denis de Crombrugghe, Thomas Lejeune and all the participants at the HEC-ULg Seminar for their helpful comments.

Notes

¹Entry in the European Union by Slovenia, Slovakia, the Czech Republic, Hungary, Poland, Latvia, Lithuania and Estonia was followed by that of Bulgaria and Romania in 2007.

²If we exclude the somewhat particular case of East Germany.

³See Article 49 of the Treaty on European Union (Treaty of Maastricht, 1992) and the criteria set by the European Council in Copenhagen (1993).

⁴We refer to the term β to denote the coefficient related to the initial level of income.

⁵Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 6.3, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, August 2009.

⁶Among new members, Cyprus and Malta are excluded from the second part of the analysis as they did not previously belong to the Eastern Bloc.