Sustainable convergence in the euro area: A multidimensional process

Economic and social divergences between euro area Member States that emerged with the recent crisis have brought to the forefront of the policy debate the issue of convergence, and in particular what could be called "sustainable convergence" (i.e. a convergence process that is durable and sustainable over time). In this section the point is made that to achieve sustainable convergence among EMU members, different relevant dimensions of convergence need to be fostered. Convergence should indeed be looked at as a multi-dimensional process, whereby nominal, real, social, cyclical convergence (as affected by both business and financial cycles) and convergence towards resilient economic structures are different but relevant and interrelated dimensions. Together they concur to determining the longer-term socio-economic and political sustainability of EMU. The empirical analysis shows, for instance, that real convergence (measured as real GDP per capita), weakened with the crisis, especially among the older euro area Member States. Differences among these countries in income distribution and in poverty rates were widened by the crisis too. Moreover, business cycles appear to have differed significantly in terms of amplitude across euro area Member States since the late '90s and remarkable differences have been observed in the amplitudes of the financial cycles. As shown by the experience of the recent crisis, convergence towards resilient economic structures is pivotal for a well-functioning EMU. This section argues that measures aimed at further deepening of the Single Market, labour market reforms that protect workers more than jobs, effective education and training systems and well-functioning financial markets are particularly relevant under this dimension. It is also argued that avoiding very large asymmetries in financial cycles is important to promote macro-financial stability in the institutional set up of EMU. Completing the Banking Union, making significant progress on the Capital Markets Union and strengthening macro-prudential policies in EMU would all contribute to preventing the building up of unsustainable asymmetries in financial cycles.