Economic Convergence in the European Union

1
Economic Convergence in the European Union

• Presented by
• Viorica Revenco
• Revi Panidha
• Eda Dokle

2
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

3
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.

4
Growth Rate (ii)

• Even a small change in a countrys growth rate
  can make an enormous difference in terms of
  living standards.

5
Total Output Sources of Growth

• The output equation
• Y AF (K, L)
• Y total output K the economys use of
  capital L the economys 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/Krate of capital growth aK
  elasticity of output with respect to capital aL
  elasticity of output with respect to labor.

6
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.

7
The Solow Model (i)

• A famous model of economic growth developed by
  the Nobel laureate Robert Solow in the late
  1950s
• It attempts to address 3 major issues
• Relationship between a nations growth and
  fundamental factors such as population growth
  rate, saving rate and rate of technical progress
• Evolution of nations rate of economic growth
• The convergence phenomenon

8
The Solow Model (ii)
k- Capital per worker y- Output per worker
9
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

10
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

11
Ireland Before 1973 EC Accession

• Economy strictly oriented and depended on British
  ties 55 of exports to UK
• Agricultural Output one quarter of GDP

12
Ireland Economy in the EU Integration Context

• Increased Trade and Decreased Dependence on UK
• FDI
• Funding via EC (EU) budget

13
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

14
Ireland - FDI

• Low Corporate Taxation of 10 gt Increase in FDI
•   

15
Ireland GDP per Capita increase as of EU
Average
16
Ireland GDP per Capita Convergence to EU-15
Average
17
Greece Peculiar Case

• EC membership in 1981
• Convergence Process starts in the mid 1990s

18
Greece Economic Development

• Greek Economic Miracle (1949-1975) highest
  rates of growth in the world of 10 (following
  Japan ones)
• Late 1970s, 1980s and mid 1990s decline in
  the rate of growth to 1.2
• 1996 beginning of actual convergence

19
Greece Real GDP Growth Rate since 1996
20
Greece Growth Peculiarity

• Low levels of FDI major capital controls
• Community Support Framework (CSF) Program gt
• CSF II (1994-1999) EU transfers of 3.5-4 of
  annual GDP gt 1-2 contribution to the rate of
  growth
• CSF III (2000-2006) EU transfers of 3 of
  annual GDP gt 0.7-1.2 contribution to the rate
  of growth
• CSF IV (2007-2013) EU transfers of 20 bil gt
  projected contribution of 0.6-0.8 to the rate of
  growth

21
Greece GDP per Capita (PPP-Dollar)
22
Greece GDP per Capita Growth Rate
23
Greece GDP per Capita Convergence towards EU-6
24
Germany Slowdown in Pace of Growth

• GDP growth rates
• 1950s 8.2
• 1960s 4.4
• 1970s 2.8
• 1980 2
• 1991 (Unified Germany) 1.3

25
Germany Decrease in FDI
26
Germany - Real GDP per Capita Convergence towards
EU Average
27
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)

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Thank you!
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Questions Comments