Real Convergence of EU Economies: Do Structural Breaks Matter?

This study examines the real GDP convergence of EU Member States. It adds to the abundance of conditional convergence studies by utilizing a unit root test with up to two structural breaks, finding that the crisis has not stopped the long run convergence within the EU. Differing from similar studies, we discriminate between up and down breaks in the convergence process, and apply the non parametric Wilcoxon signed-rank test to identify variables that are coincidental with these shifts. Convergence accelerations are characterized by nominal exchange rate and unit labour cost changes, while slowdowns are followed by investment shocks. The importance of external trade is particularly emphasized during convergence accelerations. Several different robustness checks leave these findings quite intact.