Institutional, Nominal and Real Convergence in Europe

Abstract The purpose of this paper is to assess nominal and real convergence within the EU countries; both processes have been largely shaped by the advances in institutional integration. The review section provides a theoretical framework to investigate the manifold links between real, nominal and institutional convergence. After a descriptive analysis of sigma-convergence of selected real variables, in order to econometrically investigate how the process of institutional integration has affected real convergence, we have computed (and included in the regressions) an “ad hoc” integration index, which takes into account the progressive steps toward closer integration followed by EU countries. The empirical results – concerning the EU-27 countries (mostly for the period 1990-2007) – show that in EMU countries real convergence is well established in terms of productivity, labor market indicators, output correlations; only the pattern of convergence in economic structures is not so clear. On the other hand, the New Members have shown a generalized catching-up in terms of productivity, but some difficulties in respecting nominal conditions; moreover, possible concerns refer to the still different specializations and consequently low output correlations. Moreover, in a specific section there is an examination of the impact of the recent financial and economic crisis that has caused not only greater instability and deteriorated real performances, but also “divergence” in key nominal and real variables. Some policy solutions to cope with the post-crisis uncertain scenario are finally discussed.