Growth and financial development in EU: convergence or divergence?

We study the relationship between convergence in growth and financial development in the EU throughout 2005-2015, using the time-varying factor model of Phillips and Sul (PS, 2007). Our contribution to the literature is twofold: including the more recent years to assess income convergence and using a comprehensive measure of access, depth and efficiency for financial markets and institutions (IMF, 2016) to benchmark financial systems. We have several results. First, countries approach multiple long-run growth paths; second, integration of financial systems is prevented by clustered financial markets; third, there is a significant association between real income and financial club memberships: countries converging to higher-run growth paths mainly belong to the top-performing financial clubs. This asymmetry can setback economic integration within EU.