The Eurozone's future: Nominal, real and structural convergence

Objective:  The objective of this paper is to analyze the long term dynamics of the  Eurozone with the emphasis on the convergenge processes (or the lack of thereof) It is today generally recognized that the growing real divergencies (i.e. the diverging competitiveness) between the Eurozone members are at the root of the recent crisis and the current growth restoration difficulties. The discussion in this paper looks historically at the dynamics (i.e. the convergenge vs. divergence) of both nominal – i.e. the Maastricht criteria, and real variables. Moreover, the recently emerging concept of a “structural convergence” is critically evaluated.

Background: The nominal convergence is the key to the functioning of a monetary union. It determines the effectiveness of monetary policy, especially in the organization like EMU (Eurozone), where the monetary centralization operates in the environment of decentralized fiscal structures, limited fiscal transfers between the participating entities (independent states) and very limited labor mobility. In such an environment, the diverging trends between the participating entities (states) are unlikely to be compensated for by induced factor movements and/or structural changes (not to mention fiscal transfers etc.), as happens in the similar dynamics within the centralized political entities (individual states).

However, the real convergence is crucial for the political and social stability, which is in turn the degree of commitment to the preservation of the common endeavor – i.e. the EU itself

Finally, the structural convergence determines both the effectiveness of common policies and ultimately the form of the EU commonality itself.

Method and Data: Nominal convergencies  are described by looking at the history of major Maastricht criteria variables (inflation, budget balances, public debt and interest rates) for individual countries. Real convergencies are then evaluated by comparing the dynamics of GDP per capita, productivity and unemployment for the same countries.  The question of a structural convergence is then discussed from the standpoints of both the EU and individual countries.  Data for the study are obtained from the Ameco,  Eurostat and the ECB. 

Expected Results:  Whereas the recent EU measures largely restored the nominal convergence, the real convergenge still remains at best problematic. In addition, the challenges of the structural convergence remain significant.  As recent developments demonstrated, unless addressed, this divergence trend may constitute a significant, and perhaps the ultimate, threat to the Eurozone cohesion and perhaps to its existence.