Crisis and Convergence in the European Union

The success of the integration process of the new EU Member States is reflected by the convergence performance. These tendencies are of special importance considering further enlargement of the Eurozone. The financial and economic crisis of 2008 has resulted, however, in a fundamentally new situation as regards these issues. The paper considers real convergence, catch-up processes and in terms of these the main economic growth trends. The analysis was focused on the exploration of the potential growth dynamics. The production function approach was applied. Focus was principally set on the supply-side of the economy. In the production function the potential growth can be calculated based on the labour and capital inputs and the development of TFP. On the one hand the paper reveals the long-term (several decades) tendencies on the other hand it analysis the mid-term tendencies (2010-2015) taking into account the current crisis in an especially detailed way. The data used originates basically from the AMECO database, Ageing Report and the databases and analyses of the EPC Output Gap Working Group. Convergence and catch-up cannot be considered as an automatic result of EU-accession. The catch-up processes of the MSs can be analysed methodologically by means of growth accounting, through a production function approach and the calculation and interpretation of the catch-up rate. The financial crisis has affected the different MSs to different extent. The symmetric shock has had asymmetric consequences. The intensity of the impacts of the financial crisis depends on the initial circumstances and the vulnerability originating from them. Henceforth the countries of the EU27 are categorized into 4 groups based on the potential growth dynamics, the investment as a share of the GDP, the main economic and economic policy peculiarities, the advancement in the field of the Lisbon Agenda and to less extent their location. (The groups are: “Developed countries”, “Mediterranean countries”, “Catch-up countries”, “Vulnerable countries”.) Summarising: the financial crisis might generate significant decrease in the potential output and it might have a remarkably negative impact on the labour (on the non-demographic driving forces, such as the NAIRU), capital and TFP. As regards the potential growth and the contribution of the individual factors the most unfavourable trends were to be experienced in the case of the ‘Mediterranean' and ‘vulnerable' countries. In the period analysed the catch up will practically stop in the country group indicated. The decrease in the dynamics of the potential output to be predicted for the coming years shows a dramatic size. In certain new member states the real convergence might stop in the short run and even divergence might occur compared to the more developed countries. This convergence crisis might cause severe tensions in the medium-term period indicated both in the countries affected and the EU.