Getting Closer or Falling Apart? Euro Area Countries After the Sovereign Debt Crisis

Abstract

We study convergence and divergence dynamics in a sample of euro area countries by assembling an extensive dataset that contains information on public spending and policy outcomes in a variety of areas of government intervention including education, health, and civil justice from the early 1990s. We also focus on other important determinants of a country’s economic performance such as the level of regulation of product and labor markets, as well as the trust in political institutions, quality of governance, and inequality. Results show that despite divergent economic growth in the euro periphery countries after the 2010-12 sovereign debt crisis, the quality of services and level of regulation did not deteriorate or indeed improved, increasing convergence with the core euro countries. However, the euro area sovereign debt crisis dramatically worsened citizens’ perceptions of quality of governance, as well as the level of social trust. This calls in question the future political viability of the EMU project and asks for reform.

Keywords: Euro, Debt, Crisis, Convergence, Reforms, Governance, Trust

JEL Classification: H5, G01, P48, P51