Financial Cycle Convergence: Evidence on Financial Cycles Synchronisation in the European Union and the European Economic and Monetary Union

Financial cycles are an established phenomenon in economics. An increasing collection of studies captures and quantifies financial cycles, their average duration and amplitude. Here we examine the national dimension of financial cycles in the euro area and their relationship to real GDP cycles. We use data on bank lending to businesses and households, as well as house prices in the European Union (EU) and the European Monetary Union (EMU) over a sample period of about 20 years. Financial cycles behaviour is more synchronised and convergent in the (EMU) area compared to the dynamics the authors reveal in the (EU) area. Germany and Luxembourg show a divergent financial cycles path and have a different relative transition path than the other clubs. In summary, we find empirical evidence that financial cycles dynamics vary across the (EU) Member States. The dynamics depend on the national debt level and monetary sovereignty position. There is no evidence of one distinct financial cycle convergence on the (EU) level. Moreover, we find evidence on two distinct convergence clubs with country members listed above. The identified convergence clubs show two distinct financial cycles patterns, one clearly more homogeneous for countries in club 1. The second one, in convergence club 2, is far more heterogeneous and divergent from one in Club 1. Also, the financial cycle dynamic in Club 2 is far more heterogeneous than the one we evidence for country members in Club 1.