Convergence and Divergence Tendencies in the European Union: New Evidence on the Productivity/Institutional Puzzle

The World Bank (WB) has described the European Union (EU) as a convergence machine, and the real and institutional convergence has been achieved for a long period of time, and EU’s cohesion policy, alongside the Recovery and Resilience Facility (RRF), remains crucial for driving reforms and fostering investments that promote growth. But, in the last two decades this convergence machine has stopped working, and the convergence process has turned in the divergence. The divergence process poses a great risk for the smooth functioning of the EU, and it increases vulnerability of the EU to negative economic shocks. Productivity and institutional convergence are a necessary precondition for the smooth functioning of the EU, reducing differences in standards of living, increasing resilience, and achieving environmental sustainability. In the present paper, we will apply log t-test over the period 2003–2023 to investigate the formation of productivity and institutional convergence clusters. Our goal is to identify which countries belong to the poor productivity/institutional clubs, and to provide the necessary policy implications. Results indicate the existence of multiple steady states, which means that EU is vulnerable to external economic shocks