Upward Convergence in the EU: Definition, Measurement and Trends
Text: Massimiliano Mascherini, Eurofound
The economic crisis has brought the concept of upward convergence, namely improving the economic and social performance of Member States while reducing disparities between them, once more to the centre of European policy debate. Despite this renewed interest, the meaning of upward convergence and how to measure it remains unclear to many observers.
Prior to the unfolding of the economic impact of the COVID-19 crisis, Europe recorded seven years of uninterrupted growth, with the employment participation rate reaching the highest level ever recorded in the history of the European Union. While these numbers point to positive developments for European societies, not all Member States benefited equally from the recovery. Among the peripheral countries, those that suffered the most during the crisis and recorded trends in their economic and social performance that diverged from those of core countries, the recovery was more muted than in other parts of Europe.
Upward convergence, meaning the improvement of Member States’ performance economically and socially combined with a reduction of disparities among them, is key for sustaining the cohesion and legitimacy of the EU. Convergence towards better living and working conditions has always been an EU political promise, and failure to deliver is likely to feed political discontent against the European project.
From as far back as the 1960s to the end of the 2000s, Member States made substantial progress regarding upward convergence in their economic and social performance, particularly in the wake of progressive EU enlargement processes. According to the World Bank, the EU has become the modern world’s greatest “convergence machine”, given its capacity to propel poorer and newer Member States towards becoming high-income economies (Gill and Raiser, 2012).
However, upward convergence trends stalled with the onset of the global financial crisis, when the socio-economic heterogeneity of Member States increased. As a result of the economic crisis and of subsequent austerity measures, there was concern that divergence could lead to an erosion of European models of the welfare state. This would call into question the EU’s continued ability to provide its citizens with some of the highest living standards and lowest income inequality in the world.
Whether or not convergence is achieved may also have an impact on the trust placed in European and national political actors and institutions, potentially undermining political support for maintaining or deepening economic and political EU integration. In fact, with increased disparities among Member States, citizens are certain to lose confidence in the ability of the EU and their own governments to deliver on the promises of better working and living conditions. For these reasons, while the EU should embrace the logic of upward convergence, monitoring convergence is crucial if policymakers are to be provided with the knowledge and information necessary to identify the areas that are in the greatest need of policy intervention.
Renewed debate on convergence
While in the EU treaties the term “convergence” is explicitly mentioned only in reference to the common currency, in the last decade and as a consequence of the asymmetric impact of the economic crisis, promoting convergence has returned to the top of the EU agenda. There is now a greater emphasis, however, on social convergence and its link with the economic domain (Eurofound, 2018a).
The renewed debate around convergence began in 2012 with the Four Presidents’ Report, which discussed economic as well as social and structural imbalances within the Economic and Monetary Union (EMU). This report represented an important paradigm shift in the policy debate as it recognised that the EMU has to be reformed in order to sustain the euro and to reconcile its proper functioning with broader EU economic and social objectives (Van Rompuy et al, 2012).
The subsequent Five Presidents’ Report, in 2015, highlighted for the first time the need for convergence in the economic and social dimensions of both the EU and EMU within the same agenda. Since unemployment – and particularly long-term unemployment – fuels inequality and social exclusion, efficient labour markets and welfare systems that can absorb shocks and avoid divergence are essential for the smooth functioning of the EMU and for building more inclusive societies (Juncker et al, 2015).
European Pillar of Social Rights and the Social Scoreboard
The European Pillar of Social Rights, proclaimed in 2017 by EU leaders at the Social Summit for Fair Jobs and Growth in Sweden, is one of the major initiatives launched in recent years to reimbue the EU’s economic aspirations with a strong social dimension. Its overarching aim is to serve as a compass for a renewed process of upward convergence economically and socially among Member States. With the aim of building a fairer Europe with a strong social dimension, the Pillar aims to deliver new and more effective rights for citizens, structured around three people-centred categories:
- equal opportunities and access to the labour market, covering aspects of fairness related to education, gender equality and equal opportunity
- fair working conditions, covering labour force structure, labour market dynamics and income
- social protection and inclusion, covering fair outcomes through public support and social protection.
The Pillar builds on ideas introduced in the 2013 Social Investment Package (European Commission, 2013), which placed more emphasis on social investment, human capital and equal opportunities and is often said to have consolidated the important paradigm shift initiated by the 2012 Four Presidents’ Report (Vandenbroucke, 2017). The European Pillar of Social Rights is accompanied by the Social Scoreboard, which is designed to track the performance of Member States in the three broad measurable policy dimensions of the Pillar via headline and secondary indicators. The Social Scoreboard complements existing monitoring tools and feeds into the economic policy coordination within the European Semester.
Upward convergence in the socioeconomic dimension
In this section, we investigate whether economic and social upward convergence has been restored among Member States since the economic crisis, taking into consideration the period 2008 to 2018 and the performance of the EU27 Member States.
DEFINING UPWARD CONVERGENCE
Despite the increased political significance of upward convergence, lack of clarity over its exact meaning persisted and a formal definition was still missing. To fill this gap, Eurofound defined upward convergence as “the improvement of Member States’ performance in moving closer to a policy target, combined with a reduction of disparities among them”. Furthermore, Eurofound provided a formal mathematical definition to enable the design of monitoring strategies (Eurofound, 2018a).
Upward convergence, or moving closer together in an upward trajectory, is therefore the union of two concepts: an improvement in performance towards a desirable target and convergence itself, in other words reducing disparities in performance.
The concept of “performance improvement” is ultimately related to making progress towards a policy target of better living and working conditions, as, for example, those defined in the Europe 2020 strategy. This makes upward convergence a normative concept related to a political consensus on the desirable direction of the indicator in question.
Eurofound’s work on monitoring upward convergence in the EU takes account of several dimensions: socio-economic, employment, working and living conditions. This research also investigates convergence in the headline indicators of the Social Scoreboard accompanying the European Pillar of Social Rights (Eurofound, 2019b; European Commission 2019). Further information on the measurement of upward convergence is provided in the box at the end of this article. Here we examine upward convergence in the following six indicators:
- real GDP per capita
- nominal wages
- income inequality
- employment rate
- unemployment rate
- AROPE (risk of poverty and social exclusion) rate.
These indicators measure in a consistent way the main economic and social developments in Europe over the period under consideration. Some (income inequality, employment rate, unemployment rate and AROPE rate) are headline indicators of the Social Scoreboard.
Real GDP per capita
The investigation of dynamics in real GDP per capita is often adopted as a good proxy for whether upward convergence in the economic dimension is occurring. The data show that, despite the impact of the economic recession, between 2008 and 2018 real GDP per capita in PPS (purchasing power standard) increased in all 27 Member States. Depending on the measure of convergence used, however, convergent and divergent trends in this indicator can be identified (see the box at the end of this article). Critically, while overall variability may have increased, poorer countries caught up substantially with richer countries, and the relative variability among Member States decreased considerably in this period. On average in the EU, real GDP per capita grew from 25,614 PPS in 2008 to above 31,000 PPS in 2018 (unweighted averages). In this period, all the Member States apart from Greece increased their real GDP per capita. Patterns vary, however, in levels and gaps over different phases of that time span: in 2008 and 2009, a step backwards was recorded against the backdrop of the economic crisis.
„A European minimum wage policy could more generally support greater convergence in wages and disposable income among countries, regions and population groups. “
After this initial reversal, upward convergence has been restored in the EU, driven mostly by the rapid catch-up of Malta and the Eastern European Member States – the Baltic states, Bulgaria, Croatia, Hungary, Poland, Romania and Slovakia. These showed faster growth rates than other countries that had higher initial levels of real GDP per capita. Conversely, the Mediterranean Member States displayed an opposite trend. While Cyprus, Spain and Italy increased their real GDP per capita during this period, they have now slipped below the EU average, indicating a relative deterioration in their performance. Furthermore, real GDP per capita decreased in Greece in this period; this is the only decrease recorded in the Member States during 2008–2018. Convergence is particularly evident since 2008 among non-euro zone Member States, which exhibited higher levels of disparity at the beginning of the 2000s. In the euro zone, the positive trend in real GDP per capita was accompanied by increased variability among Member States.
Wages play an essential part when it comes to the well-being and living standards of individuals. At the macro level, concerns about disparities in wage levels between European regions and Member States already emerged with the enlargement of the EU towards the east; these disparities have been aggravated following the uneven impact of the economic crisis among European countries. Upward convergence in wages is studied through nominal wages, measured in euros adjusted to reflect purchasing power parity (PPP) and inflation differences among EU countries. The analysis confirms a clear process of upward wage convergence that took place within the EU in the period 2008–2018. This was mainly due to strong catch-up growth in Eastern European Member States, as well as low growth or small declines in virtually all the pre-2004 Member States (the EU15) that record the highest relative wage levels.
Two distinct periods can be identified. In the first period, 2008–2011, upward convergence came to a halt because of the severe impact of the financial crisis. This effect was felt more in the countries of the European periphery, where a notable fall was registered in relative wage levels in several lowerwage Eastern European and Mediterranean countries, such as the Baltic states, Romania, Greece and Portugal. By contrast, wage levels were generally more resilient in higher-wage countries.
Upward wage convergence between EU countries re-emerged strongly after 2011. This period recorded a strong process of wage catch-up by Eastern European countries. Exceptions were Hungary and Croatia, which registered a relative decline, while in Slovenia wage levels remained stable. Among higher-wage countries, the evolution of wage levels in relation to the EU average was generally comparable to that of the previous period.
The increase in inequalities is of great concern to policymakers. The Social Scoreboard monitors trends in income inequality through the income quintile share ratio. This measures the inequality of income distribution, calculated as the ratio between the total income received by the highest-earning 20 per cent of the population (the upper quintile) and the 20 per cent of the population with the lowest income. (Figure 1) During the period 2008–2018, income inequality increased in the EU, as did disparities among Member States. Hence, the trend has been one of downward divergence. Income inequality increased from 4.8 in 2008 to 4.9 in 2018 (unweighted averages), though the trend was not constant over time. The indicator remained almost unchanged until 2012, but was then followed by an increase over 2013–2015. Since 2015, income inequality has decreased steadily.
Overall, income inequality has increased in half of the Member States. Between 2008 and 2018, Lithuania and Bulgaria had the biggest increases (from 6.1 to 7.3 and from 6.5 to 7.6, respectively). These were already among the worst-performing countries in 2008, and inequality continued to rise even when the rest of the EU saw a decrease. Nevertheless, not all the Member States saw an increase: there were reductions in Poland (from 5.1 to 4.2) and Portugal (from 6.1 to 5.2). These countries, however, followed different patterns. Poland had a higher level than the EU average in 2008 but then caught up – reaching 4.2 in 2018, lower than the EU average. Portugal, on the other hand, was higher than the EU average in 2008, and it remained above the average in 2018, at 5.2.
Europe 2020 set a target of increasing the employment rate of the working age population (20–64 years) to 75 per cent by 2020. The employment rate is a headline indicator of the Social Scoreboard. This indicator increased from 71 per cent in 2008 to 73.8 per cent in 2018, despite a decrease recorded in 2008–2013, when it fell to 68 per cent (unweighted averages). Overall, there was a decrease in variability across the Member States, with the poorest-performing countries catching up strongly with the best-performing countries. Therefore, the pattern showed upward convergence from 2008 to 2018. (Figure 2)
Overall, upward convergence was driven by the good performance of the Eastern European Member States – which generally showed strong catch-up trends, especially Hungary, Poland, Romania and Slovakia – as well as Malta. In particular, Hungary’s employment rate rose steadily by as much as 12.9 percentage points between 2008 and 2018. Starting below the EU average in 2008, it finished above the average in 2018, at 74.4 per cent. The Mediterranean Member States showed the opposite trend and, in some cases, the employment rate actually fell over the period of observation. Greece recorded the sharpest employment decrease (−6.8 percentage points), followed by Spain (−2.6) and Cyprus (–1.5).
The unemployment rate is another headline indicator of the Social Scoreboard. It was 6.6 per cent in the EU27 in 2018 – still slightly higher than in 2008, when it was 6.4 per cent, but much better than the 11.2 per cent rate in 2013 (unweighted averages). A positive trend has been recorded in all Member States since 2013. While some countries with a higher level of unemployment caught up with those that had a lower level, the overall variability of Member States was still substantially higher in 2018 than in 2008, as the performance elsewhere markedly deteriorated in that period. As a result, the overall trend is one of downward divergence. (Figure 3)
Despite the strong recovery in more recent years, the unemployment rate in Greece was three times the EU average in 2018. It rose from 7.8 per cent in 2008 to a striking 27.5 per cent in 2013, falling to 19.2 per cent in 2018. Cyprus, which had one of the lowest unemployment rates in the EU in 2008, and Spain experienced comparable developments. Some positive patterns also emerged. The most significant decreases were observed in countries such as Germany and Hungary, where unemployment fell 4 percentage points from 2008 to 2018. These were followed by Poland and Slovakia (–3.2 and –3.1, respectively).
In general, the decline in the unemployment rate was driven by a catch-up of Eastern European Member States such as Croatia, Hungary, Poland and the Baltic states, which converged towards the best-performing countries. On the other hand, Mediterranean countries such as Greece, Italy and Cyprus deteriorated from their initial level and recorded considerable increases in the unemployment rate, which drove a divergence in performance overall.
Reducing poverty and social exclusion is one of the targets of Europe 2020, and the AROPE indicator is a headline indicator of the Social Scoreboard. The share of the population at risk of poverty and social exclusion, as measured by the AROPE indicator, decreased from 24 per cent in 2008 to 22.8 per cent in 2017, despite peaking in 2012 at 25.7 per cent. The disparities in the performance of Member States decreased at the same time, so the trend for the period is one of upward convergence. During 2008–2017, the worst-performing countries, including Romania, Bulgaria and Latvia, caught up with the best performers. Poland is especially noteworthy: the AROPE rate was above the EU average in 2008 (30.5 per cent compared to 24 per cent) but decreased steadily by 11 percentage points up to 2017, falling below the EU average. (Figure 4)
Not all countries showed a decrease. In Greece, for example, there was an increase of 6.7 percentage points, starting from a higher level than the EU in 2008. Similar patterns of divergence are observed in Spain, Italy and Cyprus. Luxembourg and Denmark also recorded a deterioration in their performance.
Upward convergence prone to setbacks during recessions
The analysis presented in the previous section shows that during the period 2008–2018, upward convergence took place in the majority of the social and economic indicators examined: real GDP per capita, nominal wages, employment rate and AROPE rate. Only two showed downward divergence: the unemployment rate and income inequality. These findings are consistent with those of other studies performed on a broader set of indicators, including on all the headline indicators of the Social Scoreboard (Eurofound, 2019a, 2019b).
This is very good news, as it indicates that the impact of the financial crisis has been absorbed by most Member States and that Europe is back on the right track. However, the instability of these upward convergence trends should ring alarm bells about their sustainability in any future recession. These unstable patterns imply that upward convergence is recorded when the economy is growing, with improvements in performance and a reduction in disparities among Member States. But when the EU goes into recession and the economy takes a downturn, downward divergence is recorded, meaning a deterioration in the indicator in question and an increase in disparities across the Member States. Eurofound (2019b) found that this dynamic of upward convergence affects most trends in the headline indicators of the Social Scoreboard, in particular those related to employment participation, poverty and social exclusion. The strong cyclical component of these trends suggests that the upward convergence of Member States is unstable and unsustainable. Member States therefore need to strengthen their resilience in the economic and social policy domains to achieve sustainable upward convergence and to avoid a descent into divergence with the next downturn.
Policies to promote upward convergence
Upward economic and social convergence is increasingly seen as fundamental for the stability of the single currency and for fostering further integration among Member States. In her policy guidelines, Commission President Ursula von der Leyen has advocated for the full implementation of the European Pillar of Social Rights (von der Leyen, 2019). Doing so would constitute a decisive step in strengthening the economic and social resilience of Member States against future macroeconomic shocks and their uneven knock-on effects in the social domain.
Policy interventions to achieve the goals of the Pillar could include transnational automatic stabilisers that would act as fiscal shock absorbers by limiting the impact of idiosyncratic negative shocks on sustainable upward convergence. One widely discussed stabilisation mechanism is a European unemployment reinsurance scheme, which ties into the right to unemployment benefits of reasonable duration as set out in the Pillar. While there are several ways in which such a scheme could be designed, in principle it would comprise a central EU fund that would pay out to national unemployment schemes during an economic downturn, providing some slack for national public finances and helping Member States rebound from economic crises. This would reduce macroeconomic risk and, at the same time, support convergence in the socio-economic conditions of the unemployed. It would additionally prevent divergence among Member States by acting as a rapid automatic counter-cyclical mechanism.
Pay, in contrast, is explicitly excluded from the areas on which the EU has a mandate to intervene (as per Article 153(5) of the Treaty on the Functioning of the European Union). Nevertheless, there is a precedent for such interventions – most recently in the form of the country-specific recommendations issued to some Member States within the European Semester (see also Eurofound 2014a and 2014b). Following Ms von der Leyen’s commitment in the political guidelines to ‘ensure that every worker in our Union has a fair minimum wage’ in order to ‘allow for a decent living wherever they work’, the Commission is currently considering a legal instrument to ensure that minimum wages are ‘adequate’ and set in a transparent and predictable way on traditional national lines.
While this announcement and the consultation document for the first phase of consultation with the social partners suggest a shift of focus towards employees, there are hopes that a European minimum wage policy could more generally support greater convergence in wages and disposable income among countries, regions and population groups. It might also contribute to reducing the number of working poor, shrinking wage inequalities within Member States and preventing social dumping.
The implementation of this policy proposal would, however, be politically sensitive and have to carefully balance the positive effects on wages with potentially negative effects on employment and working hours. It would also have to take into account the crucial role of the social partners in wage setting. The implementation of both these policy options could equip Member States with additional tools to increase their resilience to shocks and to head off diverging trends in employment and socio-economic conditions. Furthermore, implementing the provisions of the Pillar – and the social convergence they are designed to support – could itself highlight the need for new legislative initiatives in the EU. It could also encourage Member States to act on their own to reach a higher level of convergence not only in labour market policy but, especially, in the capacity and quality of institutions. This joint effort would further contribute to building both resilience and sustainable upward convergence in living and working conditions among European Member States.
Measuring upward convergence
Measuring upward convergence involves the measurement of two concepts: improvement and convergence.
Improvement is usually measured through changes in unweighted averages of Member States’ performance. Unweighted averages are used to give to each Member State the same representation and importance in computation of the overall trend.
Eurofound distinguishes between two types of upward convergence.
Strict upward convergence occurs when all Member States improve their performance while the disparities between them are reduced. In this case, no country is left behind.
Upward convergence occurs when an improvement is recorded in the EU average while disparities are reduced. In this case, the EU average is improving, but not every Member State records an improvement.
In addition to these two cases, and following the same logic, Eurofound (2018a) defines three other possible situations: upward divergence, downward divergence and downward convergence. A downward trend indicates a movement away from the desirable direction of an indicator, while divergence describes a rise in disparities.
Convergence is usually measured through three statistical measures: beta-, sigma- and delta-convergence. The three measures investigate different aspects of the convergence process, such as the catching-up of poorly performing countries with the best performers and the reduction of the overall disparities among Member States.
Beta-convergence is used to measure whether countries starting from initially low-performance levels grow faster than better-performing countries. This process is also referred to as catching-up.
Sigma-convergence refers to the overall reduction in disparities among countries over time and is measured by the evolution of the statistical measures of dispersion, such as the standard deviation or the coefficient of variation. A decrease in the standard deviation or coefficient of variation over time indicates convergence.
Delta-convergence is used to analyse countries’ distance from the best-performing country. Deltaconvergence is usually measured through the sum of the distances between the Member States and the top performer.
To access Eurofound’s work on upward convergence, visit its EU convergence monitoring hub at http://eurofound.link/convergencehub
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