Economic Convergence
in the European Union
Presented by:
Viorica Revenco
Revi Panidha
Eda Dokle
The Theoretical Economic
Background of Convergence
• What economic variable has the major role in
convergence?
• The Solow Model – theoretical framework of
convergence
• Economic convergence within EU – empirical
evidence
Growth Rate (i)
• The causes of economic growth has occupied
some of the best minds in the world of
economics and commerce.
• Robert Lucas and Growth Theory
Nobel Prize winner remarked that once you start
thinking about economic growth, it is hard to think
of anything else.
Growth Rate (ii)
• Even a small change in a country’s growth rate
can make an enormous difference in terms of
living standards.
Total Output & Sources of Growth
• The output equation
Y = AF (K, L)
Y – total output; K – the economy’s use of capital; L – the economy’s use
of labor;
A – productivity.
• The growth accounting equation
∆Y/Y = ∆A/A + aK ∆K/K + aL∆L /L
∆Y/Y – rate of output growth; ∆A/A – rate of productivity
growth; ∆L /L – rate of labor growth; ∆K/K—rate of capital
growth aK – elasticity of output with respect to capital; aL –
elasticity of output with respect to labor.
Sources of Growth
• Productivity growth – the source of long-term
growth (FDI, win-win situation)
• Knowledge – replicable at a low cost, in contrast
to capital and labor
• Labor and capital are scarce and have an inherent
Diminishing Marginal Returns feature that makes
them a source of medium-term growth.
The Solow Model (i)
• A famous model of economic growth developed
by the Nobel laureate Robert Solow in the late
1950’s
• It attempts to address 3 major issues
1. Relationship between a nation’s growth and
fundamental factors such as population growth rate,
saving rate and rate of technical progress
2. Evolution of nation’s rate of economic growth
3. The convergence phenomenon
The Solow Model (ii)
k- Capital
per worker
y- Output
per worker
Solow Model - Conclusions
• It supports the fact that in a group of countries
with similar characteristics, the relatively poorer
ones tend to grow faster than the relatively richer
ones – convergence phenomenon
• In support to this idea economic development
of specific EU members is further analyzed
Core-Periphery Model
• Mega Core Countries
France, Germany, Benelux, Austria, Finland,
Sweden, UK and Northern Italy
Capital Intensive
• Periphery Countries
Ireland, Greece, Spain, Portugal and
Southern Italy
Labor Intensive
Ireland Before 1973 EC Accession
• Economy strictly
oriented and depended
on British ties – 55% of
exports to UK
• Agricultural Output –
one quarter of GDP
Ireland – Economy in the EU
Integration Context
• Increased Trade and Decreased Dependence on UK
• FDI
• Funding via EC (EU) budget
Ireland – Increased Trade and
Decreased Dependence on UK
• Exports to UK decreased to 18% in the first years
following the accession
• Exports to EU countries (excluding UK) increased to 43%
in 2003
• Trade Deficit of €340 mil in 1973
• Trade Surplus of €34.7 bil in 2003
Ireland - FDI
• Low Corporate Taxation of 10% => Increase in FDI
•
Ireland – GDP per Capita increase as
% of EU Average
Ireland – GDP per Capita
Convergence to EU-15 Average
Greece – Peculiar Case
• EC membership in 1981
• Convergence Process
starts in the mid 1990’s
Greece – Economic Development
• Greek Economic Miracle (1949-1975) – highest rates
of growth in the world of 10% (following Japan
ones)
• Late 1970’s, 1980’s and mid 1990’s – decline in the
rate of growth to 1.2%
• 1996 – beginning of actual convergence
Greece – Real GDP Growth Rate
since 1996
Greece – Growth Peculiarity
• Low levels of FDI – major capital controls
• Community Support Framework (CSF) Program =>
CSF II (1994-1999) – EU transfers of 3.5-4% of annual
GDP => 1-2% contribution to the rate of growth
CSF III (2000-2006) – EU transfers of 3% of annual
GDP => 0.7-1.2% contribution to the rate of growth
CSF IV (2007-2013) – EU transfers of €20 bil =>
projected contribution of 0.6-0.8% to the rate of
growth
Greece – GDP per Capita (PPPDollar)
Greece – GDP per Capita Growth
Rate
Greece –GDP per Capita
Convergence towards EU-6
Germany – Slowdown in Pace of Growth
• GDP growth rates:
1950’s – 8.2%
1960’s – 4.4%
1970’s – 2.8%
1980 – 2%
1991 (Unified
Germany) – 1.3%
Germany – Decrease in FDI
Germany - Real GDP per Capita
Convergence towards EU Average
Convergence – Reality, but not a
Pledge
• Core periphery countries – upward tendency of
GDP per capita to the EU average
• Mega core countries – downward tendency of
GDP per capita towards the EU average
• Conditional upon the creation of a benefic
economic environment – undertaking of
effective macroeconomic and structural policies
(Greece peculiarity)
Thank you!
Questions
& Comments