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Eurozone economic integration: Historical developments and new challenges ahead

Author

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  • Bagliano, Fabio C.
  • Morana, Claudio

Abstract

The paper yields a structural account of economic integration in the Eurozone from its inception to post-pandemic developments by considering a broad range of convergence measures. We introduce a novel FAVAR framework, extracting the structural shocks driving the Eurozone business and financial cycles directly from the cyclical components they generate. Productivity advancements have been the critical trend convergence factor, shaping long swings in real, labor market, and financial dispersion. Subdued cost-push shocks were the key driver of Eurozone nominal and competitiveness convergence throughout 2015 but have become an all-rounded divergence force since then. Fiscal discipline imposed by the Stability and Growth Pact (SGP) increased real and financial divergence during all recessionary episodes, while the ECB expansionary monetary policy was a convergence factor. The SGP suspension during the recent pandemic recession and recovery has partially counteracted divergence pressures. Looking forward, convergence will crucially depend on how productivity dynamics and economic growth will fend off further unfavorable cost-push developments, which might become pervasive in a deglobalization-driven new macroeconomic regime.

Suggested Citation

  • Bagliano, Fabio C. & Morana, Claudio, 2025. "Eurozone economic integration: Historical developments and new challenges ahead," European Economic Review, Elsevier, vol. 176(C).
    • Handle: RePEc:eee:eecrev:v:176:y:2025:i:c:s001429212500073x
    DOI: 10.1016/j.euroecorev.2025.105023
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    More about this item

    Keywords

    Real; Nominal and financial convergence and divergence; Eurozone; Economic integration; Recessions; Financial crises; Subprime financial crisis; Sovereign debt crisis; Pandemic recession; FAVAR models;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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