Unconditional Convergence in Currency Unions: An analysis of European regions from 1991 to 2009

WWWforEurope Policy Paper No. 4, 45 pages We analyze unconditional within-country convergence from 1991 to 2009 in 21 European countries. Unlike most previous studies we focus on the heterogeneity of convergence. We find that convergence processes in currency unions are extremely heterogenous, highly discontinuous and strongly concentrated: Only around half of the regions starting with below national average GDP per capita levels in 1991 experienced catching-up over the period analyzed and two thirds of the regions starting with above average GDP per capita converged towards the national average. The average duration of the longest spell of unbroken above average growth for poor converging regions lasted for five years, while the longest below average growth rate spell for these regions lasted for three years. About two thirds of the growth rate differential of the average catching-up region to the national average over the period can be attributed to the year with the strongest growth. In addition, human capital and innovation are the main predictors for the propensity of a region to catch-up. These stylized facts therefore question the focus of the traditional literature on average (beta-)convergence and suggest substantial non-linearities in regional convergence processes and imply that growth strategies based on increasing human capital investments and innovation capacities are the most likely to be successful in triggering convergence in monetary unions