Cyclical Convergence in Europe

In order to ensure a smooth functioning of EMU it is important that business cycles of individual participating states do not diverge too much. The present study compares the business cycles of individual EU member states to the cycle of the euro area aggregate - which is considered the relevant reference cycle - over the period 1973-1996. The degree of cyclical convergence among the 11 states participating in EMU is found to be high. This result proves to be robust to the particular de-trending method used. In addition, we find that the impact of German re-unification on cyclical convergence is relatively limited. The UK, however, shows a clearly different cyclical pattern compared to the present euro area. This may complicate the conduct of the single monetary policy if the UK were to enter EMU. (JEL E30, E50