On December 1991, the Maastricht Treaty (officially the Treaty on European Union) was passed and initiated at the 46th of the European Community in Maastricht, Netherlands after two days of debate in the summit. It leads to the creation of the euro and concentrates on the goal for the European Community to establish the political union and the economic and monetary union. Since 1991, Maastricht standard, also known as the convergence standard, controls for inflation, public debt and deficits, exchange rate stability and interest-rate convergence.
The coming together of the countries of the European Union had one idea and objective. The states held onto the belief that they would have shared prosperity among all nations. The convergence of the country members to the European Union (EU) has witnessed bifurcation. The states had one thing in common which as to ensure all the countries that had a low income per capita were encouraged and provided for affirmative action that would have gone a long way in making them be at per with the other countries that are believed to be in a higher human per capita. The states that had joined the union as new members have shown a tremendous improvement relating to the per capita (Merler 22). Two of the countries have already diminished and have closed the existing gap between them and the countries that are believed to have a higher per capita income.
The relationship between the membership of the Euro and the convergence is extensively researched with the latest being the IMF study that aimed to identify the differences between the real convergence and the nominal a survey that was conducted in 2017. The European Commission also sends out a report on the convergence quarterly. The entry into the Euro status has realized the fast growth of countries as they aspire to catch up with the other countries that had joined the membership at an early age.
Many pioneers have studied and contributed to this topic. Studies have also revealed that some of the states are growing at a much slower rate compared to the others. It is indicated in the country’s standard of investment and education among other indicators. If the countries score higher in the measures as mentioned above, it implies that the countries have a more growth rate (Lessmann,2017). This paper will thus quest to provide an informed response to the question which states; To what extent GDP has converged within European countries since 1991? What about before 1991? What are the determinants?
One thing needed to be mentioned is that restrictions and limitations also exist in this study. The main reason is possible to be the various factors that may influence each other. The outliers in the data could affect the regression model so that to make some errors. Also, the limitation of data may result in inaccuracy.
There are many studies focusing on this topic. In the article “” written by Henry Goecke and Michael Hüther, they state that as interregional integration is clearly defined as a political objective of the European Union, some differences of convergence exist between the regions in Europe, even there was a convergence trend since 1991. Many eastern European countries, as well as several regions of Spain and Portugal, are characterized by convergence processes, while the situation is opposite in Greece, Italy and much of Britain (Goecke, 2016). They conduct an OSL model based on mean GDP growth rate 1950-2012 and log GDP per capita in a different area to find the convergence at the national level. It shows the initial economic strength of countries and different area with different productive ability both influence the afterward convergence development. The confluence is anticipated to be on the increasing upward trend in the coming five years and to be on a restart for the countries located in the North and South of the region. However, the convergence of the countries in the East and West Regions is expected to continue with the upward trend. It illustrates the specific challenges facing regional development. This paper uses the model from this study as a reference and analyzing the method of the study “Regional convergence in Europe”.
Another reviewed paper is “Regional inequality, convergence, and its determinants – A view from outer space” written by Christian Lessmann and André Seidel published in 2017. This paper gives a special method to study region convergence by analyzing the dataset of regional income inequalities of some countries according to satellite nighttime light data to study the convergence. Firstly, they find the relationship between luminosity data and available regional income data within countries and conduct OSL model to get estimation results for an out-of-sample prediction of regional incomes to research the regional income differentials in developing countries whose regional data are not available. Secondly, they get an N-shaped relationship between development and regional inequality in the model (Lessmann, 2017). They find that there is divergence within regions as most countries converge so that they study for income inequality to discuss this issue. They use the factor classification to add different potential determinants of regional inequality to the regression model in turn and get the result with GINIW as the dependent variable. Also, resources, mobility, trade openness, aid, federalism, and human capital are also very important, which affect as external factors. Lessmann and Seidel’s study gives inspiration to this paper by its analysis method and gives the idea that income inequality effects divergence among regions as an important point when studying convergence in Europe.
The third helpful study for this paper is ‘Income convergence during the crisis: did EU funds provide a buffer?”. The author, Silvia Merler, conducts a model study to discuss how the convergence of EU is affected by crisis and how the EU reflects to economically. It contributes to this paper that how to integrate the economies of different regions during the crisis and assess the role of these funds in providing more vulnerable regions with the aim of promoting convergence of average EU income levels crises. In the study, the author does not conduct the OSL model, rather than tests regional convergence during crises by analyzing the level of Purchasing Power Standard per capita changing as time goes. He gets the estimation by using purchasing power regional GDP per capita to illustrate convergence continued during the crisis but seemed to stop in some regions in the EU(Merler, 2016). However, regional policies help countries to overcome the crisis by providing funds and other benefits.
Although ideas from these three reviewed pieces of literature are not all shown in this paper, they offer very useful ideas for the following study and gives inspiration for studying the topic.
To ensure the validity and authenticity of the article, the national data will be collected from Penn World table and the latest version 9.0. The reason to choose this dataset is its reliability since the Penn World Table has long been a standard data source for those interested in comparing living standards across countries and explaining differences in cross-country growth.
This paper mainly digs into identifier variables and choose current price GDP as the research target. To getting a more accurate result, the following data are used: Identifier variables, Real GDP, employment and population levels, Current price GDP, capital and TFP, National accounts-based variables, Exchange rates and GDP price levels, Data information variables, Shares in CGDPo, Price levels, expenditure categories, and capital.
The current data describes the purchasing power parity for real GDP in the tables had been solely based on relative prices of consumption and investment, ignoring differences in the relative prices of exports and imports. According to Feenstra, Heston, Timmer, and Deng (2009), the data trends indicate real GDP was more appropriately a measure of relative living standards rather than of relative productive capacity.
In addition to the reliability of the data, the useful measuring income differences show what extent differences in endowments of human and physical capital.
After 1991, the average investment rate for each country and population growth rate are observed. The dataset contains multiple observations for each country. In order to reduce this to the data just needed for the main exercise (estimating a basic Solow model). First, let’s “filter” the observations so that we only have the data starting from 1991.
This study reveals that there has been a weakening convergence for countries that are in the Western region of Europe due to the successive shocks that have affected the macroeconomic stability in the region. The successive economic shocks have also affected the economic expectations of many countries in the region. The effect on the economic stability of the countries has made it had for the countries to maintain positive stimuli relating the fixed investments, which is the driving force to achieving technical change. The study also identified that the small and poorer countries experienced significant convergence as compared to the more privileged countries that are considered rich. The convergence of some countries mainly the 11 from the eastern and central European region that joined the union have continued to experience an increased convergence at a much faster rate than projected bearing in mind that they had an initial income capacity level at entry. The convergence is projected to be on the increasing upward trend in the coming five years(Lessmann 13). The convergence is also to be on a restart for the countries located in the North and South of the region.
History has always dictated the long-term convergence as it has been considered a stable economy and a prominent trader of the region outside the region. The EU could be viewed as a mature economy based on national Real GDP and income rate. It implies that a cross-region difference may be reduced if the convergence process was ongoing. Also, the convergence was hit by the recession period and had it stagnate over a period. 根据表加点说明The convergence in the region seemed to have stopped and could be related to the crisis that presented itself between the nineteen seventy and nineteen ninety. It has to be admitted that the financial crisis gives a bad influence on the economic convergence gains that had been experienced by the EU after the nineteen seventy periods. It implies that the convergence presents limitations in spite of some countries having monetary unions that are categorized as having a solid base.
[bookmark: the-convergence-outlook]However, the perceived emerging countries in the EU witnessed an upward trend in the convergence. Since the regions in the EU were provided with incentives that enabled them to increase their per capita income at a nice rate. The countries were presented with the opportunity to have a much more advantage at market level and provision of financial allocations that ensured the regions perform better in terms of production and availability of the required resources for maximum output of goods and services that meet the needs and requirements of the consumer market. It was actualized based on the goals and aspirations of the EU to have prosperity for all nations and the ability for all the countries to share a common currency. The trading barriers that existed within the states were eliminated and thus creating an enabling environment for the poorer states to trade on an equal platform as the other members of the EU. The GDP per capita of these regions has been on an upward vertical trend and was less affected by the Euro financial. The convergence was identified in the countries as they had a negative relationship on the subsequent growth and the primary income.
In economic convergence, history cannot be used to project the history of convergence. If this were the case, it would be appropriate to justify that the small and emerging countries will continue to witness the economic growth based on their past growth, this might not be the case as the favoring environment that made their goods and services retail easily and at reasonable prices might not hold. The legislation that provided for affirmative actions for nations that are believed to be unfortunate to be brought to the same equal level as those that are perceived to be established might change and impact negatively on the affected nations. The economic conditions might also change given the shifting in the lands that were recognized to be rich and superpowers. The countries enjoy the benefit of having a sizeable innovative workforce that produces commodities in large quantities at a low price and performs the same function as their more expensive options. These countries are a significant player in determining the world market for them and thus cross effect convergence would apply. It is also worth to note that convergence could also be at the output and input level. The input bears in mind the level of investment and the level of educational contributions that a country has in place (Goecke 164).
In conclusion, the entry into the Euro status has realized the fast growth of countries as they aspire to catch up with the other countries that had joined the membership at an early age. It does not mean everything is rosy with all the countries that have joined the union. Studies have also revealed that some of the states are growing at a much slower rate compared to the others. The poorer countries in the region have witnessed an increased convergence compared to their counterparts that are considered to be more advantaged. The objective of the EU that strived to ensure all the countries are at per has had a positive effect on the rise of the income capita of the poorer nations. Lastly, it is worth noting that the financial crisis in Europe and the recession in the US played a significant role in the slow convergence of the European regions. The level of convergence also is dependent on the input and output convergence.
- Harrell, F. E. (2015). Ordinal logistic regression. In Regression modeling strategies. Springer, Cham, pp.311-325
- Goecke, H, and M. Hüther. (2016). Intereconomics, vol. 51, no. 3, pp. 165-171.
- Merler, Silvia. (2016). Income convergence during the crisis: did EU funds provide a buffer? Working Papers 17081, Bruegel.
- Lessmann, Christian & Seidel, André. (2017). Regional inequality, convergence, and its determinants – A view from outer space. European Economic Review, Elsevier, vol. 92(C), pp. 110-132.
- Groningen Growth and Development Centre. (n.d.). Real GPD. Retrieved from https://www.rug.nl/ggdc/productivity/pwt/