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Ten years of EMU: convergence, divergence and new policy priorities

  • Nikos Christodoulakis

Has the single currency promoted or hindered convergence among the countries of the Eurozone? On the one hand, asymmetric shocks have subsided after the creation of the single currency and FDI has been substantially promoted both inside and outside the EMU as a result of reduced exchange rate volatility, more integration and better institutional functioning. On the other hand, an examination of the catching-up process between the less and more affluent countries of the Eurozone suggests that convergence has been fading since the EMU was initiated in 1999. Another worrying development in the Eurozone is the emergence of unprecedented CA deficits in the southern Eurozone countries, while the northern Eurozone group enjoys substantial surpluses. Although both groups of countries have attracted increased FDI flows after EMU, there seems to be a sharp differentiation regarding size and composition. In the southern countries, the housing sector has attracted relatively more investment than the production sector, while the reverse seems to be the case in the northern group. Thus, investment in the northern (southern) Eurozone countries has increased traded (non-traded) output and caused an improvement (deterioration) in the trade balance. To face such imbalances, new policy priorities are required in the Eurozone that put more emphasis on convergence and competitiveness.

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File URL: http://eprints.lse.ac.uk/23192/
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 23192.

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Length: 52 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:ehl:lserod:23192
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