Strengthening economic convergence in Europe

The engine of convergence is still running in Europe, but it seems to be running at a somewhat slower and less even pace. On closer analysis, it turns out that the pace of convergence among the 19 euro area countries dropped decisively after 2007, while the pace of convergence among the nine non-euro area countries did not. Overall, the slowing of convergence is having adverse political effects in Europe, and rising anti-Brussels sentiment is putting the European project at risk. These days, there is a strong tendency to call for less union, not more; as most dramatically expressed by Brexit. Yet, a strong and united European Union (EU) is crucial for its members, and this is neither the time to cut back on regional integration, nor the time to forego the crucial role of the euro in working effectively for all the members of the euro area. To establish a true monetary and political union, robust fiscal and financial mechanisms need to be put in place and more fiscal spending at the EU-wide level is warranted, above all in the areas of: (1) EU-wide infrastructure; (2) EU-wide research and development; (3) the harmonization and increased collection of corporate income taxation and wealth taxation; (4) more vigorous economic relations with Europe’s near-neighbourhood; and (5) more proactive investment-led growth policies with China. To sum up, Europe should bolster its fiscal, monetary and industrial policies to ensure vigorous investment-led growth in the 2020s, based on sustainable development and vigorous convergence within the EU, and including Europe’s neighbourhood.