Economic growth in 26 European Union Economies: evidence from conditional convergence

Abstract This study investigates conditional income convergence among 26 European Union member states from 1995 to 2022, focusing on GDP per capita growth and complemented by an analysis of unemployment dynamics. Three advanced heterogeneous panel estimators are employed: the pooled mean group autoregressive distributed lag (PMG-ARDL) and dynamic common correlated effects ARDL (CS-ARDL) to capture linear relationships, and the pooled mean group nonlinear ARDL (PMG-NARDL) to account for potential asymmetric adjustments. These methods address slope heterogeneity, cross-sectional dependence, and nonstationarity. Panel unit-root and cointegration tests confirm long-run relationships, and Dumitrescu–Hurlin tests assess causality. In the linear PMG and CS-ARDL models for GDP per capita growth, inflation and gross capital formation hinder long-run growth, while government spending, labor force participation, and trade openness have positive effects. In the unemployment models, GDP growth, trade openness, and government spending reduce unemployment, whereas inflation and gross capital formation increase it. The nonlinear PMG-NARDL results reveal that the direction of change in variables such as government debt, capital formation, inflation, and trade openness matters, with positive and negative shocks often having different long-run effects. Error correction terms across models indicate stable adjustment, in some cases with damped oscillations. Policy implications show the need to maintain price stability, improve the efficiency of public investment, sustain trade openness, and promote labor force participation alongside prudent debt management. Convergence patterns remain heterogeneous across member states, reflecting differences in structural and policy characteristics.