Tuesday 15 March 2016

Economic myths I: the European convergence myth


Politicians and people employed by European institutions often argue that we should have further economic, fiscal and financial integration in the European Union. They claim that this would inevitably lead to economic convergence between its member states, allowing poorer member states to catch up with the richer member states. As the European Commision puts it in a recent report: 'A complete EMU is not an end in itself. It is a means to create a better and fairer life for all citizens, to prepare the Union for future global challenges and to enable each of its members to prosper'. And according to European Commission President Juncker, 'the time has come to deepen European integration instead of re-introducing national divisions'.

This all sounds pretty good, but is it true? Will further integration really lead to convergence? To answer this question, it is interesting to take a look at the history of Italy. Italy was unified in 1861, but it has always been a diverse country. In a recent study, Emanuele Felice from the Autonomous University of Barcelona investigates the evolution of regional income inequality in Italy since its unification in 1861. He considers relative per capita GDP in Italian regions in the first year of each decade, from 1871 to 2001. Instead of economic convergence, he finds a tendency towards economic divergence in the Italian union since 1871: regional economic inequality has substantially increased over the past 150 years. In 1871, per capita GDP in the Southern regions in Italy was 90% of overall per capita GDP in Italy, while that of North-Western regions was 114% of overall per capita GDP. By 2001, relative per capita GDP in the South had declined to 68% (!), while that in the North-Western regions had increased to 124%. The decline in the South was especially pronounced after the first World War. Felice also finds a divergence when he considers the per capita GDP of 20 individual Italian regions. One striking example is Sicily, which went from 95% in 1891 down to 58% in 1951 and 66% in 2001. While the reasons for increasing regional income inequality after Italian unification are not clear, these findings demonstrate that it is simply not true that economic, fiscal and financial integration inevitably leads to economic convergence. The Italian case suggests that European unification could very well increase regional inequalities within Europe.


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