Do institutions of the euro area converge?

In this paper, we analyzes institutional convergence across eurozone economies with data of six institutional variables for the period December 1998- July 2018. The underlying motivation is that institutional factors, apart from affecting economic performance in the short-run, are key determinants of the long run per-capita income levels of the countries. We apply the third-generation panel unit root test developed by Bai and Carrion-I-Silvestre (2009) to test for stochastic convergence and complete the results with distribution dynamics analysis. We find that no convergence has taken place either across the members of the whole eurozone, or in any of the several sub-groups of this area considered in the analysis; we also detect a general institutional degradation in the peripheral and Eastern countries with respect to the best positioned countries. We also find that the Eastern members of the eurozone suffered backsliding in Investment Profile since their accession to the euro area, but not in the other five institutional indicators. Our results suggest some policy prescriptions that would require a new approach towards the implementation of the European cohesion policies.