The Euro and the Illusion of Economic Convergence

European countries who are members of the euro currency are not becoming more similar. This the conclusion of new research by Philip Haynes and David Alemna. They evaluate the impact of recent international events on countries who share the euro. This is the conclusion of a recent application of the innovative research method, Dynamic Pattern Synthesis (DPS).

The goal of the countries who share the euro is to achieve economic and social convergence. The period studied allows for examining the impact of Brexit, Covid-19, and the war in Ukraine. The research uses DPS to examine the complex dynamic of influences across a range of key variables including inflation, growth, interest rates and government borrowing and debt.

While euro member countries do not all converge in the same direction, clusters of similar countries do emerge. Some of these small group similarities  and their data patterns are consistent over time, but some of the variable patterns that cause the similarity do change .

An example of a small similar cluster  is Germany, the Netherlands, Luxembourg, and Ireland. They remain in the same cluster for the three years researched, 2016, 2019, 2022.

They share below average long term interest rates, and lower levels of government debt. And have consistently above average GDP per capita and import to export ratios. One variable that impacts their cluster membership in 2016 and 2019 is above average productivity, but not in 2022.

Conversely, several southern European countries share consistently below average GDP per capita and productivity.

The full paper (Open Access at ) explains other smaller subgroupings of similar countries and the reasons they exist and change marginally over time. For example, another similar subgroup is the more recent euro member cluster of Latvia, Slovakia, and Estonia. Some countries like Finland and France have less consistent similarities to others over time.

There is scant evidence that sharing a single currency causes euro members to become more similar.

Haynes, P.; Alemna, D. Convergence Trends in Euro Economies: Financial Crisis Recovery and the COVID-19 Pandemic. Economies 2023, 11, 284.