Convergence Determinants and Club Formation in the EU over 1999-2021

Within the EU, the applied decomposition of the GDP per capita over 1999-2021 reveals that labour productivity is a dominant contributor to economic growth, followed by employment, though the impact of each factor is largely non-uniform among countries. Although the fast-converging economies benefit from productivity gains, the core EA countries have lost some of their long-term growth capacity. Despite the implemented measures, almost all EU countries experience an aggravating age structure. In 2020, digitalization was evidenced to have mitigated the negative effects of COVID-19 on productivity and employment. The estimated panel model accounts for these developments by including other relevant convergence factors such as human capital, regulatory quality and debt. The investments are empirically inferred to be a transmission channel of the positive impact of higher institutional quality and the adverse influence of higher debt stock on economic growth. While in times of high indebtedness, the expenditures on education are found to be crowded out by interests, the low debt is not necessarily associated with greater spending on education. Eventually, these inferences are graphically supported by the three-club formation derived through the K-means clustering algorithm. Although such distribution is generally in line with the neoclassical growth theory, it also reveals disturbing EU heterogeneity due to worsening demographic dynamics, rising indebtedness and insufficient regulatory quality. The derived club formation is not tightly related to EMU membership. Overall, to enhance the speed and quality of the convergence, the EU countries have to strengthen their institutional and fiscal framework.