EU INTEGRATION, CAPITAL FLOWS AND CONVERGENCE

Abstract

The countries of Central and Eastern Europe which joined the European
Union in 2004 and 2007 (New Member States, NMS) have recorded – prior
and after their accession – robust growth and were able to converge with the
rest of the EU (Old Member States, OMS). Economic growth in the NMS has – to
a large extent – been driven by external capital inflows, predominantly from
the OMS. It is argued that both capital inflows to the NMS and their convergence with the OMS were underpinned by the advancing integration of the
NMS with the EU. Capable to integrate, the NMS increased their credibility as
perceived by international investors. Official EU funds, although dwarfed by
private capital flows, are also instrumental in the process of convergence of
the NMS. During the global crisis of 2007–2009 convergence of some individual NMS has reversed due to their inappropriate macroeconomic policy. In section 1 convergence underpinned by external financing is briefly put in a historical perspective. Section 2 includes stylized facts on capital flows into the
NMS. In section 3 links from capital inflows to convergence in the EU are discussed. Section 4 concludes with policy recommendations designed to strengthen the process of convergence.