Economic Convergence in the European UnionPresented 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 issues1.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 (PPP-Dollar)

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