World Economy

Some Eurozone Convergence May Be Resuming

The European Central BankThe European Central Bank

Convergence between the eurozone’s richer and poorer economies appears to be resuming, but income gaps remain huge and the euro has not been a catalyst for reducing inequality, a study published by the European Central Bank showed.

Membership of the currency union was considered an economic booster, anchoring confidence and attracting investment to fuel growth that would let Mediterranean and central European countries catch up, Reuters reported.

“It is striking, however, that little convergence has occurred among the early euro adopters, despite their differences in GDP per capita,” the paper, which does not necessarily represent the ECB’s opinion, said.

“In contrast to some initial expectations that the establishment of the euro would act as a catalyzer of faster real convergence, little convergence, if any, has taken place for the whole period 1999-2016.”

Italy recorded the worst relative performance, but even in Spain the income gap has not declined. Early gains were reversed by the bloc’s debt crisis.

The study concluded that the euro on its own neither boosts nor hinders convergence, but in the case of southern Europe it probably masked broader problems predating the common currency.

Low productivity growth, weak institutional governance and a poor use of investment are more likely causes of divergence than the single currency’s rigidity, the study said.

Reform efforts and the bloc’s recent upswing may be halting this process, however, even if it was too early to conclude whether the changes are cyclical or more structural.

Ireland and Spain in particular may once again be closing the income gap, while many of the others are at least no longer falling behind.

The former communist nations are also doing relatively well. Lithuania, Estonia, Latvia, Slovakia and non-eurozone member Romania have achieved the largest degree of convergence, the study concluded.

“Countries have converged a lot, at least in terms of growth rates,” Draghi told a panel including the Federal Reserve’s Janet Yellen and the Bank of England’s Mark Carney in Frankfurt this month. “Probably the most important thing for a monetary union is convergence.”

Evidence that euro economies are no longer drifting apart is important because it was big divergences in Spain, Portugal, Ireland, Greece and Cyprus that took the monetary project to the brink of collapse.

It also helps reinforce the French and German push for closer political coordination to foster unity as the UK prepares to leave the European Union and the rise of nationalist parties poses a threat to deeper integration.

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