Institutional quality in the Euro area countries: any evidence of convergence?

Abstract

Divergence in institutional quality across Euro area countries constitutes a risk for the smooth functioning of the Economic and Monetary Union (EMU), increasing the vulnerability of the Euro to negative economic shocks. In this paper, we examine potential institutional convergence across Euro area countries since the onset of the Great Recession (2008–2017). We focus on a range of institutional aspects closely connected with business performance, both in the public and private sphere. While no significant pattern in the evolution of institutional quality in relation to the initial level (β-convergence) is observed, there is increasing dispersion (σ-divergence) over the crisis period (2008–2014) and non-significant (β- nor σ-) convergence over the subsequent recovery period (2014–2017). Furthermore, an increasing gap in institutional quality between the core and the periphery countries is revealed, even more pronounced over the recovery period. The findings highlight that EU wide agreements to enhance institutional quality in periphery economies are highly advisable in order to increase the stability of the Euro.