Summary of JOIE article ( 19 September 2024) by Laura Lopez Gomez, Faculty of Tourism and International Relations, University of Murcia, Murcia, Spain The full article is available on the JOIE website.
Imagine the Eurozone as a grand marathon where each runner starts at different times and from various points, yet the ultimate goal is for everyone to cross the finish line together. The Economic and Monetary Union (EMU) was established with this vision in mind—to promote economic integration and stability across its member states, helping the less developed nations catch up with their more prosperous counterparts. This ambitious concept, known as income convergence, lies at the heart of the Eurozone’s mission. However, the reality is far more complex, with some countries thriving while others lag behind. The key to understanding this disparity lies in a nuanced interplay of factors, among which political institutions play a pivotal role.
The Eurozone is often perceived as a unified economic entity, but in truth, it is more accurately described as a collection of distinct groups, each on its own economic trajectory. These “convergence clusters” reflect the varying levels of income and the quality of political institutions among member states. Why do some nations within this monetary union prosper while others struggle to keep up? The answer lies in the complex interaction of factors, with political institutions at the core.
In this study I show that political institutions—which include everything from government structures to laws and electoral systems—significantly influence economic development, albeit in ways that are often indirect and context-dependent. Strong institutions generally lead to better economic outcomes, but this relationship is not universal, especially in less developed countries. Nevertheless, political institutions are crucial for understanding why some Eurozone countries thrive while others fall behind.
The concept of economic convergence has evolved over time. Traditional studies employed a β-convergence approach, where countries were expected to grow at different rates but eventually reach a common income level. However, modern techniques, such as the Phillips and Sul (2007, 2009) cluster formation, reveal a more complex reality. Instead of a single, unified path to prosperity, the Eurozone appears to consist of distinct “convergence clusters.” These clusters show that countries tend to converge with specific groups rather than with the entire union, forming pockets of shared economic trajectories.
The study carries out a deep analysis of the Eurozone from 2002 to 2019, using advanced statistical methods, identified these clusters and highlighted the crucial role of political institutions in shaping economic outcomes. This analysis was complemented by an ordered logit model estimated via GMM (Generalized Method of Moments), which examined how two distinct aspects of institutional quality influence the convergence process. The findings are striking: rather than a single path to prosperity, the Eurozone appears to be a mosaic of different groups, each with its own challenges and opportunities, but this is nothing new, the literature has already demonstrated this lack of convergence, the main novelty of the paper is that it shows that, in all cases, weak political institutions—marked by poor governance, ineffective bureaucracies, and insufficient control of corruption— shape the steady states of the euro members and trap some countries in a cycle of low growth and underdevelopment, avoiding convergence among all euro area countries.
A more detailed analysis of the internal dynamics of each club, using HDR bivariate conditional regions, shows that even within broader clusters, there are subgroups with
better political institutional quality and higher income levels. This suggests that even within larger groups, the quality of institutions plays a crucial role in determining the specific economic trajectories of countries.
The policy implications are clear. To promote convergence within the Eurozone, policymakers must prioritize strengthening political institutions, particularly in southern and peripheral regions. Improving legal frameworks, strengthening governance, and combating corruption are essential steps. Moreover, any future expansion of the Eurozone should ensure that new members have political institutions aligned with those of existing members to prevent further divergence.
In essence, while the Eurozone may be a single economic union, its path to income convergence is far from uniform. The race toward prosperity continues, and the finish line remains elusive for some. To help all members reach it, specific reforms and stronger institutions are essential. Without them, the gap between the richest and poorest members will only widen, threatening the long-term stability and cohesion of the union.
The Eurozone is not institutionally symmetric; it’s a dynamic dance floor where each country moves to its own rhythm. To ensure that everyone can join the dance and move in harmony, we must teach those lagging behind the right moves—strengthening institutions and making smarter investments. Only then can the Eurozone truly achieve its goal of shared prosperity and stability, ensuring that no one is left behind in this grand marathon.