Figure 1 presents the evolution of GDP per capita in selected euro area countries from 1990 to 2019. As it is clear from the figure, the group of EA-12 countries in our sample grew at approximately the same rate before joining the Economic and Monetary Union in 1999. With the monetary union, we first observe a period of sharp convergence, when relatively poorer countries like Spain and Greece grew much faster than richer countries such as Germany, Belgium, Austria, or the Netherlands. After the euro area sovereign debt crisis, since 2010, we observe a process of divergence with richer countries growing faster than poorer ones, particularly with respect to Greece, whose economy collapsed.
Keeping these figures in mind, we now look at what happened to the variables in our sample. Borrowing from the economic growth literature (e.g., Barro and Sala-i-Martin 1992), we use both sigma-convergence and beta-convergence to check for convergence/divergence trends across countries.Footnote 11Sigma-convergence is a standard measure of dispersion among countries (e.g., the standard deviation) in each specific year: a rising value along years suggests increasing divergence and vice versa. The analysis of beta-convergence, instead, focuses on the average annual growth rate of a variable over a given period and compares it with the initial value of the series: if lower initial levels are associated to subsequent higher growth rates, there is evidence of convergence. These two indicators capture the same phenomenon (indeed, beta-convergence is a necessary, although not sufficient, condition for sigma-convergence), but the former allows to appreciate trends over a long period, whereas the latter to look at convergence/divergence in specific time intervals.
We compute sigma- and beta-convergence for each variable in the sample of EA-12 countries. Online Appendix 2 reports the graphs (Figs. A2.1–A2.10) regarding sigma-convergence for our indicators, while Table 2 provides a qualitative summary of the results, displaying “plus” and “double plus” (“minus” and “double minus”) to indicate, respectively, weak or strong convergence (divergence).Footnote 12 Results are reported for the three periods under consideration: before the introduction of the euro; after 1999 but before the outbreak of the sovereign debt crisis in 2010; after 2010. As a robustness check, following Mihaljek (2018), we also replicate our analysis of sigma-convergence after excluding Ireland and Luxembourg, two potential outliers (an offshore financial center and a tax haven for global corporations, respectively) which may bias our dynamics. The corresponding graphs are reported in Online Appendix 3 and largely confirm all our previous results.
Starting with Tertiary Education (Fig. A2.1), the analysis of sigma-convergence shows that EA-12 countries in the sample converged in terms of expenditure between 2004 and 2011, when the sovereign debt crisis induced a short temporary divergence. This is confirmed by beta-convergence (not displayed in the Online Appendix), with initially lower spending countries increasing their expenditure more than higher spending ones, a trend that on balance has not been affected by the crisis. The crisis has also not affected outcome, measured by the share of graduates, which shows an overall convergence along the whole period under consideration. Concerning our proxy for the organization of the service, however, some dispersion emerges; indeed, sigma-divergence in the students-teacher ratio across countries grew uninterruptedly after 2008 because of the recession.
A similar story emerges for the Health Care Sector (Fig. A2.2). Government expenditure started diverging after the beginning of the great financial crisis, and so did the number of staffed beds in hospitals. However, the HAQ index, which was sharply converging before the crisis, did not diverge after it. Also, in the case of life expectancy at birth and at age 65 (for both men and women), there is no evidence of divergence after the outbreak of the euro area sovereign debt crisis.
A more complex pattern characterizes Civil Justice (Fig. A2.3), for which information is available only after 2004. Concerning expenditure, convergence tends to prevail after the outbreak of the euro area sovereign debt crisis. Moreover, a marked convergence emerges in terms of the number of procedures after this crisis, as in many countries reforms were implemented to enhance efficiency in the judicial system by reducing procedures, especially in euro periphery countries such as Greece, Spain, Italy, and Portugal. However, several countries also show a remarkable growth of the length of trials, which slightly decreased only in Italy and Portugal. This increased divergence.
The Labor Market series show clearer dynamics (Figs. A2.4 and A2.5). Expenditure as a percentage of GDP increased rapidly after the great financial crisis in the countries hit by the recession and this increased the divergence between 2008 and 2010. After then, convergence resumed. Concerning labor market regulation, a sharp convergence for permanent contracts emerges after the euro area sovereign debt crisis, parallel to what had happened for temporary contracts before it. Indeed, Portugal, Spain, Greece, Ireland and, to a lesser extent, Italy and France reduced protection for regular permanent contracts. Furthermore, the process of sigma-convergence for female labor market participation continued in EA-12 countries despite the crisis, while, as expected, a sharp sigma-divergence characterized (male and female) unemployment rates after the outbreak of the crisis until 2013. Unemployment, in fact, increased everywhere immediately after 2009, with the only exception of Germany, where it declined.
As far as the Doing Business (average) indicator is concerned (only available since 2004), there was a slight convergence before 2008 (Fig. A2.6). However, because of the great financial crisis, the process of convergence strengthened, particularly after 2011. Again, the countries that achieved the strongest improvements were those that suffered the worst consequences of the sovereign debt crisis, namely Greece, Italy, Portugal, and Spain. The same process characterizes Product Market Regulation (Fig. A2.6): even in this case, the convergence process among EA-12 countries after the crisis towards a reduced protection is strong. In addition, after a period of sigma-convergence before the crisis, EA-12 countries started diverging also in terms of Fiscal pressure immediately after 2007 (Fig. A2.6).
Different results emerge about the Quality of Governance (Fig. A2.7) indicator. After the foundation of the EMU and up to the great financial crisis, divergence increased following a deterioration in the indicator in Southern Europe, particularly in Greece, Italy and, to a lesser extent, Spain, and Portugal. The euro area sovereign debt crisis influenced this scenario by worsening it. Consequently, divergence increased even further. Indeed, in the extreme case of Greece, the index fell by 12% yearly between 2008 and 2016. About the Corruption Perception index (Fig. A2.7), convergence was interrupted by the introduction of the euroFootnote 13; then, divergence sharply increased between 2008 and 2012, when it reversed again into convergence. Italy and Spain stand out because in these countries the perception of corruption was already growing before the crisis. Divergence in Shadow Economy (Fig. A2.7) increased in the period preceding the foundation of the EMU but fell consistently after 1999. With the euro crisis, however, divergence started rising again until 2013, particularly because of the worsening performance of Greece, Italy, Portugal, and Spain.
Trust in the national Parliament and in national politicians (available only for EU countries from 2002 to 2014) continuously diverged between 2002 and 2008 and diverged even more strongly after the great financial crisis, before showing a slight sigma-convergence in recent years (Fig. A2.8). This last phenomenon is due to a broad reduction in trust levels across almost all countries. Specifically, while trust did not change in most EU countries up to 2008, it was already declining in Portugal, Italy and, most of all, Greece in the period 1999–2007. With the euro area sovereign debt crisis, apart from Germany and Sweden, a sharp reduction in trust in national institutions occurred everywhere, with Greece as an extreme case.
As for Trust in the European Parliament (Fig. A2.8), there was a slight increase in sigma-convergence before the euro area sovereign debt crisis, since Sweden became a bit less and Italy a bit more EU sceptic, but subsequently divergence prevailed sharply until 2010, when the trend became stable. However, stability was reached at a lower level of trust, as after the crisis all countries exhibited a reduction in this indicator. Social trust (Fig. A2.9), instead, was not affected by the crisis, remaining roughly constant in all countries. Hence, there are no patterns of convergence/divergence across countries.
The increasing divergence in trust in national institutions, quality of governance and perception of corruption affected Turnout at national elections (Fig. A2.9), too. After a period of substantial stability, in fact, divergence emerged between 2010 and 2013. Specifically, electoral turnout fell in Portugal, France, Italy, and Greece, while it remained stable in the other European countries. Depressing enough, European countries show a remarkable process of divergence also in the Votes for Populist parties (Fig. A2.9). Populist parties were born and raised consensus in all European countries, even those less affected by economic losses such as France, Finland, or Sweden. However, while in Greece and Spain the average annual growth rate of votes for populist parties steadily increased after the sovereign debt crisis, the growth rate is lower in countries like Italy or Austria, where the support for populist parties was already very high.
Results concerning trust and electoral turnouts are strictly related to the trends that emerge with respect to inequality and poverty: after an initial period of convergence, in fact, EA-12 countries exhibit a relevant pattern of sigma-divergence in terms of income distribution because of the outbreak of the euro area sovereign debt crisis (Fig. A2.10). In particular, the share of income held by the top 10% of the population fell significantly in Portugal, Spain, Italy, and Greece, where it was already low before the crisis, while it remained stable in the other countries, generating a remarkable diverging in the euro area.
Summing up, as already anticipated in the Introduction, a general story seems to emerge from the analysis of all these indicators. If one looks only at the economic indicators more strictly connected to efficiency and economic growth, such as our proxies for the supply of human capital, civil justice, “Doing Business” or labor and product market regulations, it does not seem that EA-12 countries are on a diverging path. Although the countries mostly stricken by the sovereign debt crisis had to reduce public expenditure on fundamental services, increase taxes and economize on the production of services, it turns out that the main output indicators, such as the HAQ index for health care or the share of graduates for tertiary education were not affected by this. Indeed, there is no evidence of divergence in the performance of the health care system and there is still convergence in tertiary education. Concerning civil justice, “Doing Business” and regulation of both labor and product markets, there is actually a very strong evidence of convergence, as many EA-12 countries hit by the sovereign debt crisis implemented massive reforms to improve the functioning of the public sector and make their markets more flexible and competitive.
However, results are reversed if one looks at institutional variables and political indicators that depend on citizens’ perceptions, such as the level of trust in national and European institutions. Perhaps surprisingly, in this case, a general divergent trend among EA-12 countries appears even before the great financial crisis and the euro area sovereign debt crisis, when the EU and the EMU seemed largely able to keep their promises. However, the degree of institutional divergence in terms of governance quality accelerated strongly after 2008. Such trend is mirrored in the growing political divergence among euro countries in terms of support for populist parties, which highly increased in periphery countries. Paradoxically, a pattern of convergence emerges with respect to the level of trust in institutions after the outbreak of the sovereign debt crisis. Unfortunately, such trend cannot be attributed to higher trust in crisis countries, but it is rather due to a reduction in the level of trust also in non-crisis EA-12 countries.