On the convergence among the EU five main countries and the crisis of Euro Area

After examining Buchanan’ theory of governments as clubs and an analysis of Mundell and others’ optimal currency area theory and the optimal monetary union as a club, the paper focuses on the EU (European Union) and EMU (Euro-monetary Union) as clubs. On this basis, with a memory formalism hypothesis, we develop empirical research on the convergence path, in a new model with spread measures, for the 5 EU main countries with 15 parameters derived from neoclassical growth theory and EU-EMU rules. The convergence and stability of the 5 main countries  in the EU club (France, Germany, Italy, Spain and the UK),  as affected by the EMU club to which 4  of the 5 countries belong, is examined by measuring their 15 parametric spreads from 2003 ( first year of normal circulation of the Euro) to 2011 ( last year of available official statistics). A trend to convergence with modest growth did actually develop before the great financial fluctuation in which divergence spread out. Divergence then reappeared with large spreads and semi stagnation. The rate of growth in GDP, the inflation rate as a proxy for the flexibility or rigidity of supply, and unemployment were the dominant parameters together with the budgetary deficit/GDP and the balance of payments deficit or surplus. To assure stability in growth of the two clubs, one needs EU and EMU monetary and fiscal policy tools coherent with the models, which are already institutionally available and not employed or employed with delays. Additional EU common rules, however, are needed to complete the unique market, particularly for labor contracts.  Further integration would face the same issues in a less free situation.