Income convergence analysis: New evidence from the Euro area

The convergence hypothesis is an important implication of neo-classical growth theory. Convergence, which became popular in the 1980s, has been studied with great interest by researchers with its different variants until today. In the literature, the convergence hypothesis has been applied to explain the inequalities of macroeconomic variables in a sample of different countries, regions and economic unions. Thus, inferences have been made about the effectiveness of the policies implemented. Euro area countries faced stagflation concerns due to the fact that it was the region most affected by the Covid 19 crisis and Russia's invasion of Ukraine. In this context, the aim of the study is to investigate whether a common policy will be implemented for the Euro area. One of the main criteria for the success of a common policy is the convergence of macroeconomic variables across countries. In this context, the extent to which income, as the most preferred macroeconomic variable in the study, has converged among the Euro area countries has been analyzed with panel unit root tests with and without taking into account the structural break. According to the findings of the analysis, the null hypothesis is rejected at 1% significance level and it is concluded that there is no income convergence in the Euro area countries. It is observed that the incomes of the countries in the Euro area, which was initially established as a trade agreement and later expanded as countries acted together not only in trade but also in other areas, do not show a homogeneous distribution. In the light of these findings, it is concluded that the common policies to be implemented for the Euro area cannot be similar in every country and therefore it is unlikely to be successful. In line with these findings, policy makers are recommended to develop regional policies instead of common policies.