Is Europe growing together or growing apart?

Abstract

While it is painfully clear that the 'ever closer' monetary and financial union in the EU has run into serious trouble there has been very little study of the degree to which the countries have become similar or different in their economic growth dynamics. This paper therefore goes beyond the traditional convergence literature to look at their dynamic convergence and explore the path of their changing similarity in the frequency domain. The results show that while a core group of countries may be developing together, there appears to be at least seven identifiable groups of countries with different growth dynamics. Greece appears to be in a class on its own. Business cycles are important but longer-term trends and higher frequency fluctuations all have a role to play in facilitating adjustment. These results provide awkward implications for policy, particularly for those who thought that simply having a union would draw countries closer together (endogenous OCA criteria). Keywords: Business cycles, growth cycles, frequency domain, wavelet analysis, cluster analysis, euro area, European Union, optimal currency area JEL Classification: C49, E32