Club convergence in EU countries. A sectoral perspective

We investigate whether economic integration within the EU has led to an increased similarity in countries’ productive structures and convergence in sector-level productivity over 1995-2018, employing the nonlinear dynamic factor model of Phillips and Sul (2007). We have several results. First, countries do not converge to a unique path and there are clustered patterns for aggregate and sector-level productivity growth. Second, despite successful integration in global production networks drives the catching up of most Central-Eastern European countries, asymmetries have increased following the recent financial crisis. Third, heterogeneity in countries’ long-run productivity reflects differences in their vertical specialization: countries approaching the high-growth paths are specialized in knowledge-intensive productions and have a lower foreign value-added content of their exports. Our analysis can be relevant for the ongoing debate on the effects of the internationalization of production, shedding light on countries’ growth prospects while indicating possible directions of policy actions.