1. Introduction

This article examines the relative performance of Eurozone countries since the start of the single currency. This extends a previous study Gough (2012) which gave a snapshot of relative performance for only one year, 2011. In Section 2 we analyse the concept of “convergence” necessary for the formation of the currency union and how it might be measured in practice. Section 3 examines the pattern of convergence for three main economic indicators – inflation, GDP growth and government debt – as well as a brief summary of patterns for each nation. Recent problems in the Eurozone have centred on the size of government deficits in certain countries, and these are examined in detail in Section 4. A wider view of convergence looking at GDP/head and unemployment is presented in Section 5, while a summary and conclusion is given in Section 6.


2. Convergence and its Measurement

The euro was brought in on January 1 1999 in eleven countries, in order that governments and businesses could use it as a means of payment and a unit of account. Three years later, in the months following January 1 2002 the national currencies were replaced by the euro and the new currency came into full operation. As James and Gough (2004) observed “the introduction of the euro was a bold, ambitious but potentially risky monetary experiment”. A single currency area of such scale and diversity of nations had never been attempted before, aiming at forming a monetary union without having a fiscal union. It was also part of a wider political ambition to build a more unified Europe.


For the new currency to work effectively it was thought essential that the economies in the constituent countries should be performing similarly. This involved a series of tests that were intended to encourage applicant nations to adopt suitable policies to bring convergence of economic performance. There were five tests:


Inflation – a country should be within 1.5% of the average of the best 3 countries

Government deficit – this should not be more than 3% of GDP

Total government gross debt - this should not be more than 60% of GDP

Interest rates – these should be within 2% of the average of the best 3 countries

Exchange rates – these should remain within the normal Exchange Rate Mechanism (ERM) banks for the previous 12 months.


These five tests centre on what is called “nominal convergence” concerned mainly with monetary issues. In contrast, so called “real convergence” (Gough (1997)) takes a wider view of performance including economic growth, unemployment rates, and the business cycle.


The five nominal tests were set both for entry and for continual monitoring post-entry to ensure convergence was maintained. Of these original five tests two are now redundant – a common interest rate is set by the ECB across all member nations, while exchange rates, by definition, have disappeared with the single currency.

The focus is therefore now on inflation, government borrowing and total debt. A wider view of real convergence would include GDP growth and unemployment.


How should we measure the convergence or divergence between nations over time? The conventional way of assessing the variability of any series is to compute its standard deviation. However, the standard deviation is measured in absolute units and can only be interpreted in relation to the value of the arithmetic mean. As a result we use an alternative relative measure – the coefficient of variation, see Yeomans (1968). The coefficient is defined as the standard deviation expressed as a % of the mean. It can be used to track the variability over time for one series - if it is falling over time the series is converging, if it is rising the series is diverging. The coefficient may also be used to compare different series - e.g. if one series has a coefficient of just 10% then it is more converged than another series with a coefficient of say 50%. We can then use this measure to track what has happened to convergence since the start of the euro, and identify how and when convergence was lost. Full convergence is achieved when the coefficient of variation is less than about 25% (see Appendix).



3. Estimating trends in Convergence

In order to undertake the task of comparison we need reliable data. There are now 17 members in the Eurozone, each with their own government departments for assembling economic data. The European Union has established its own statistical organisation, Eurostat, which compiles data for the EU and Eurozone. It provides guidelines and definitions for member nations, and collates them on a broadly comparable basis. The reliability of the aggregated data is, of course, still dependent on the standards for providing source data in each country. Eurostat publishes its data on-line on its own website. We now examine the trend and variance in three important economic series – inflation, growth in GDP and total public sector debt. 


The pattern for Eurozone inflation for the period 1999 to 2011 is shown in the following two graphs.




Inflation in the Eurozone is measured through the Harmonized Consumer Prices Index (HICP). This is designed to enable international comparison of consumer price inflation. It is use by the European Central Bank (ECB) for the monitoring of inflation in the European Union or for the assessment of inflation convergence as required under Article 121 of the Treaty of Amsterdam. The HICP uses a geometric mean for its calculation, rather than the more familiar arithmetic mean The HICP has a limitation in that excludes expenditure on housing, which is one of the most important elements of consumer expenditure.


The ECB sets itself a target of achieving an inflation rate in the range 0 to 2%. The graph above shows that inflation started very low at 1.1% in the first year of the single currency. It then rose to 2.1% in 2000 and remained remarkable steady at marginally above the target range right up to 2007. There was then a period of instability as inflation spiked up to 3.3% in 2008, and was followed by a dramatic fall back to 0.3% in 2009. Inflation got back to its normal level in 2010, only to rise sharply again to 2.7% in 2011.


The second graph shows the coefficient of variation for inflation within the 17 countries. This fell from 63% in 1999 to 29% in 2007 showing a process of convergence for almost a decade. However with the global financial crisis in 2007 and 2008, this stability was lost with some nations still remaining with positive inflation while others plunged into deflation. A move back towards greater stability was achieved in 2010 and 2011.


GDP Growth

Gross Domestic Product (GDP) is a measure of the economic activity of a nation. It is defined as the value of goods and services produced less the value of any goods and services used in their creation. It is therefore the sum of value added in the output of all industries. Alternatively, it may be measured by the sum of factor incomes - wages & salaries, rent, interest and profit. Finally, it may be measured by the sum of final expenditure – consumers’ expenditure, investment, government expenditure and net exports. The output measure is usually available first, and tends to be used by nations to interpret changes in GDP. The data for the other two methods comes after a longer time lag, but are used to check and possibly adjust the output based data. In terms of economic theory all three methods should give exactly the same answer, although errors and omissions in data will always result in differences.


The calculation of the annual growth rate of GDP volume is intended to allow comparisons of economic development both over time and between different nations. It is derived by taking GDP volume at current prices and valuing it at the prices in the previous year. The computed volume changes are then imposed on the reference year to generate a chain-linked series. Accordingly price movements will not influence the growth rate, so growth is measured in real (inflation adjusted) terms.


The trend and variance of Eurozone GDP growth is shown in the following two graphs

The average growth of the Eurozone was quite high in the first two years of the single currency. It then fell in 2003 and 2004 as many of the main countries in the Eurozone battled with recession. Growth rates picked up markedly up to 2007, but were then hit by the global financial crisis with recession in 2008 and 2009. Positive growth re-emerged in 2010, but weakened again in 2011.


The coefficient of variation between nations was high and varied over time. There was a lack of convergence in the early 2000s as the low growth in some major nations as the centre of the Eurozone (Germany, France and Italy) contrasted with high growth of some on the fringe (e.g. Greece, Spain and Ireland). A more even performance between nations followed up to 2007, but was then hit by the financial crisis which saw the coefficient of variation rise dramatically in 2008, fall back temporarily in 2009, only to rise again in 2010 and 2011.




General Government Gross Debt.

This is defined in the Maastricht Treat as the value of consolidated general government gross debt at nominal value outstanding at the end of the year. Categories of debt included general liabilities (as defined in European System of Accounts (ESA) 95), currency and deposits, securities other than shares, excluding financial derivatives and loans. The sectors of government include central government, state government, local government and social security funds. 


The trend in the ratio of General Government Gross Debt to GDP is shown below, together with the coefficient of variation between nations.



The ratio of gross debt to GDP was fairly steady between 1999 and 2008 at about 70% - well above the 60% threshold for entry. However, increasing budget deficits from 2009 to 2011 sent the ratio up to 87.2% by 2011.


The variability between nations, as shown by the coefficient of variation, was high but did not change markedly over the whole period. So while the debt levels increased alarmingly between 2009 and 2011 the relative variability between nations did not correspondingly increase.


Having analysed the trends at the Eurozone level, it is of interest to look at the patterns over time in each of the 17 countries. These are briefly summarised below. Each of the original 11 nations which entered in 1999 is compared with the Eurozone average of inflation of 2.0%, GDP growth of 1.5% and total government debt/GDP ratio of 72.6% over the whole period 1999-2011.



Performance on inflation was generally slightly better than the Eurozone average at 1.9%, but there were inflationary spikes in both 2008 (3.2%) and 2011 (3.6%). GDP growth was well above the Eurozone average at 2.0%. The total debt ratio averaged 66.2%, significantly better than the Eurozone average. The debt ratio fell slightly up to 2008 but increased sharply from 2009 to reach 72.9% in 2011



Inflation averaged 2.2% over the complete period, slightly higher than the Eurozone average. There was a marked spike in inflation to 4.5% in 2008. GDP growth over the period was 1.8%, slightly higher than the Eurozone as a whole. The total debt ratio was 97.3% over the whole period, this being the third worst performance in the Eurozone. Belgium was admitted to the Eurozone in 1999 with a debt ratio of 113.6% compared to the requirement that debt should not exceed 60% of GDP. Considerable leniency was therefore shown to Belgium in this respect. The debt ratio fell fairly consistently to 84.1% in 2008 but then rose sharply to end 2011 at 98.0%



Finland’s inflation over the period averaged 1.9%, slightly better than the Eurozone average. As with many countries there was a spike in 2008, of 3.9%. GDP growth averaged 2.3%, well above the Eurozone average, and the fourth best of any country. Total debt ratio averaged only 42.6%, the second lowest of any of the original 11 countries which started the Eurozone in 1999. The debt ratio was steady up to 2004 at about 44%, fell to 33.9% by 2008, and then gradually increased to 48.6% in 2011.



Inflation in France at an average of 1.8% was slightly better than the Eurozone as a whole. GDP growth averaged 1.5%, equal to the Eurozone average. The total debt ratio averaged 67.0%, somewhat better than the Eurozone, although the ratio had risen to 85.3% by 2011.



Inflation in Germany was the best of any of the original 11 entrants, with an average of 1.6% over the period. GDP growth over the period, rather surprisingly, averaged only 1.4%, slightly below the Eurozone as a whole. The slow growth of GDP in the period 2001-5 contrasted with rapid growth in 2006-7 and in 2011. Total debt averaged 67.6% over the whole period, somewhat better than the Eurozone average. The ratio was very steady at about 60% up to 2002, rose gently to 66.7% in 2008, and rose rapidly to 83.0% in 2010, before easing back to 81.2% in 2011. This is a worryingly high debt ratio for the country which is likely to take the main burden in bailing out other nations with severe debt problems.



Inflation averaged 2.5% over the whole period, well above the Eurozone average. The variability of inflation over the period was the greatest of any of the 11 original entrants. Inflation was above 4% in 2000-2003, and 2-3% between 2004-7; this was followed by two years of deflation in 2009 and 2010, before returning to moderate inflation in 2011. GDP growth averaged 3.9% over the period, this being the fastest growth rate of any of the original entrants. But again the pattern was very volatile – growth in excess of 10% in 1999 and 2000, about 5% up to 2007, followed by a fall of 2.1% in 2008, 5.5% in 2009 and 0.8% in 2010. Positive growth of 1.4% returned in 2011. Somewhat surprisingly total government debt ratio averaged only 45.7% over the whole period, but the pattern was again highly volatile. The ratio fell from 46.6% in 1999 to only 24.9% in 2007.There then followed a rapid deterioration as large budget deficits pushed the ratio up to 65.1% in 2009, 92.5% in 2010 and 108.2% in 2011.



Inflation was remarkably steady in Italy, with an average of 2.3% slightly higher than the Eurozone average. GDP growth averaged only 0.7%, the lowest of any of the original 11 entrants; there was a deep recession in 2008-9. The total debt ratio averaged 109.0% for the whole period and was the worst of any of the original entrants. Like Belgium, Italy was allowed to enter the Eurozone with a debt ratio far in excess of the threshold of 60% - in fact it had a ratio of 115.0% in 1999. Extreme leniency was afforded to this key country in Europe. Debt fell only modestly to 103.1% in 2007, and then rose again to 120.1% by 2011.



Inflation in the small nation of Luxembourg at an average of 2.7% was the second highest of the original entrants to the Eurozone. Meanwhile, GDP growth at an average of 3.6% was the second highest of the original entrants. Debt levels were exceptionally low throughout the period, averaging only 9.5%, this being the lowest of any nation in the Eurozone. However, there was an upward trend at the end of the period from 6.7% in 2007 to 18.2% in 2011.



Inflation averaged 2.2% and GDP growth averaged 1.8%, both slightly above the Eurozone as a whole. Total debt averaged only 54.7%, well below the Eurozone as a whole. The ratio fell from 61.1% in 1999 to only 45.3% in 2007 but then rose to 65.2% by 2011



Inflation was the second highest of the original entrants with an average of 2.6%, while GDP growth was the second lowest at 1.0%. The country was in recession in 2011 when most other countries were in recovery. The total debt ratio averaged 68.8% for the whole period, slightly better than the Eurozone as a whole. However, the debt position deteriorated through the period, starting with only 51.4% in 1999 rising to 68.3% in 2007 and ending the period at 107.9% in 2011.



Inflation in Spain averaged 2.8%, the highest of any of the original entrants. The growth in GDP averaged 2.4%, the third highest of the original eleven. However, there was a marked contrast between the high growth rates of the early years, with low growth and periods of recession in the latter years. The total debt ratio averaged only 51.6% for the complete period, well below the Eurozone average. The debt ratio on entry in 1999 was 62.4% and fell markedly to only 39.7% in 2006; it then rose to end the period at 68.5% in 2011. While there has been much attention given to Spain’s economic problems, its debt ratio is not nearly high as other countries.



Greece was one of the original applicants for entry in 1999 but was refused entry, on the grounds that it did not meet the five tests. Given the leniency afforded to some other countries, Greece felt aggrieved at this decision. It was allowed to enter two years later in January 2001. Inflation averaged 3.4% over the period 2001-11, higher than any of the original entrants. Growth in GDP averaged 1.4%, near the Eurozone average, but was highly variable. High growth rates were achieved in most years up to 2007, but this was followed by four years of recession as the country struggled with its financial crisis. The total debt ratio averaged 115.3%, the highest of any Eurozone country. On entry in 2001 it had a ratio of 103.7%, slightly better than Belgium and Italy which had been allowed entry two years earlier. The ratio then fell slightly to reach 98.8% in 2004, before climbing again to reach as much as 165.3% in 2011. This debt level, combined with recession and high budget deficits ended up threatening its continued membership of the Eurozone.



This country entered in January 2007. Since then it has experienced inflation of 2.8% considerably higher than the 2.0% for the Eurozone as a whole. GDP growth has averaged 1.0%, well above the Eurozone average of 0.3% for the same period. Total debt ratio has averaged only 33.4% compared to the Eurozone average of 77.8% over the same period. There was a very low ratio of only 23.1% on entry in 2007 but this rose rapidly to 47.8% by the end of the period.



The island economy entered in January 2008. It experienced inflation averaging 2.7% over the period 2008-11, somewhat above the average of 2.0% for the Eurozone. Growth in GDP averaged 0.8% over the period compared to a slight decline of 0.1% in the Eurozone as a whole. Total debt ratio averaged 58.9% well below the Eurozone’s 80.7% over the same period. However, debt grew from 48.9% in 2008 to 71.6% by 2011.



The island of Malta also entered in January 2008. Inflation averaged 2.8%, well above the Eurozone average of 2.0% over the same period. Growth in GDP averaged 1.7% over the period 2008-11, well above the Eurozone’s decline of 0.1%. The total debt ratio averaged 68.0% over the period, well below the Eurozone’s 80.7% over the same period. There was a slow gradual rise in debt from 62.3% in 2008 to 72.0% by 2011.



Slovakia entered the Eurozone in January 2009. Inflation in the three years 2009-11 averaged 1.9% well above the Eurozone average of 1.5% over the same period. Meanwhile GDP growth averaged 0.9%, well above the decline of 0.3% in the Eurozone. The total debt ratio averaged 40.0%, well below the Eurozone average of 84.1% over the same period. The ratio gradually rose from 35.6% in 2008 to 43.3% in 2011.



Estonia entered the Eurozone in January 2011 and so we can only compare performance in that year with the Eurozone average in that year. Inflation was much higher at 5.1% compared the Eurozone’s 2.7%, while GDP growth was very high at 8.3% compared to 1.4% in the Eurozone. The total debt ratio was a mere 6.0% compared to the Eurozone average of 87.2%.


It is clear from the above that each country has its own story and experiences, and it is very difficult to find common patterns of inflation, growth and government debt. Instead there seem to be sub-groups of countries with similar economic performances. Germany, Austria, France and the Netherlands at the centre have broadly similar patterns of experience. Italy and Belgium stand out for their high government debt, while Luxembourg’s high growth and inflation but very low debt is exceptional. Spain, Portugal and Ireland had similar experiences of high initial growth followed by a period of rapidly increasing debt and recession. Greece is exceptional in that its initial progress was dramatically wiped out by the more recent experience of spiralling government debt and deep recession. In marked contrast, Finland exhibits very good overall performance, and is the only country of the original 11 that would still pass all tests for entry. Finally, the recent newcomers of Slovenia, Cyprus, Malta, Slovakia and Estonia generally show dynamic growth and low debt levels, but coupled with rather high inflation.


4. Government Deficits and convergence

In the previous section we noted that the ratio of total government debt to GDP rose dramatically from 2007. The reason has been the sharp increase in budget deficits in nearly all Eurozone countries since that date. Data for the four years from 2008 to 2011 is shown in the table below. 



The government deficit (-) (or surplus (+)) is the net borrowing (or lending) of the whole general government sector and is calculated according to the national accounts concepts (ESA 95). It shows the difference between what the government sector spends in a year and what is obtains from taxation and other sources of revenue.  The deficit (or surplus) is then expressed as a % of GDP in that year. Data on government deficits are constantly being revised by member nations as new information becomes available. The above table is taken from a press release by Eurostat (2012).


The data shows why government deficits have given rise to such a crisis in the Eurozone. Only three countries (Luxembourg, Finland and Germany) in the Eurozone had average budget deficits of less than 3% of GDP in the period 2008-2011. The average for the Eurozone as a whole was 4.7% over these four years, suggesting that the monetary union was simply unable to meet one of its key targets for convergence. The spread of nations around the average is shown by the coefficient of variation. This was very high throughout but particularly so in 2008 and 2010.



5. Wider measures of convergence

We end with a wider look at real convergence by examining the unemployment rates and GDP/head data for Eurozone countries in 2011. 




GDP is expressed per head of the population, in the form of an index relative to the Eurozone = 100. Data is expressed in Purchasing Power Standards (PPS) which allows for differing price levels in the various countries. GDP per head is often used as a measure of prosperity in a country.  It can be seen that the tiny country of Luxembourg stands out from the rest in terms of its exceptionally high prosperity.  

It is followed by the Netherlands, Austria and then, somewhat surprisingly, Ireland comes ahead of Germany. At the other end of the table, the least prosperous country is Estonia, followed by Slovakia, Portugal and Greece.


The unemployment rate is the number of unemployed persons as a percentage of the workforce, based on the International Labour Force (ILO) definition. The labour force is the total number of people employed and unemployed. The unemployed are persons aged 15-74 who are out of work in a particular week, available to start work within two weeks and have been actively seeking work in the past 4 weeks or already found a job and are due to start work in the next 3 months The lowest rates in December 2011 were all about 5% in the Netherlands, Luxembourg and Germany, while rates in excess of 20% were found in Greece and Spain.


In terms of the variability of the data, the two measures of prosperity showed similar characteristics. GDP/head among countries of the Eurozone showed a high coefficient of variation of 47.6%, while the unemployment rate showed a coefficient of 48.7%.



6.  Summary and conclusion

So whatever happened to convergence in the Eurozone? The limited degree of convergence that existed in 1999 was largely lost eight years later, when in 2007-8 the twin shocks of the global recession and financial crisis exposed the Eurozone’s fault lines.


Inflation was broadly subdued and stable between countries up to 2007, at a rate just above the upper limit of the 0-2% set by the ECB as its target for price stability. From 2008 onwards all convergence was lost, with the Eurozone swinging first into an inflation spike and then almost into deflation. There also was increasing diversity between nations, with some suffering significant deflation.


Total government debt as a % GDP, was fairly stable in the period up to 2007, but at a level some 10% above the 60% threshold required for entry. Yet it would be incorrect to describe this situation as converged, as three countries Belgium, Italy and Greece has debt ratios over 100% for most of this period. From 2008 onwards, the average debt ratio for the Eurozone rose dramatically in response to huge budget deficits in several countries.


Government deficits were supposed to be contained by the Stability and Growth Pact of 1997, limiting deficits to no more than 3% of GDP. However, any country could plead “exceptional circumstances” and leniency was the rule in practice. Hence the Pact failed to impose discipline and deficits grew alarmingly in 2009 and 2010. This led to a gradual loss of confidence in the working of the Eurozone, and particular to severe problems for high debt nations in financing their deficits. Greece was, and still is, in the eye of the storm, although Spain, Portugal and even Italy are threatened by contagion. Over the last four years the coefficient of variation has lurched one way and then another, as each country tried to react to its own problems. Only Finland and Luxembourg seem to have the position firmly under control.


Economic growth between nations has never shown any real convergence. There was generally a triple split between the mature industrial nations at the heart of Europe, the nations bordering the Mediterranean and new nations in Eastern Europe. All were hit by the global recession and financial crisis in 2007 and 2008, but to varying degrees. Finally, prosperity as measured by the unemployment rate and GDP/head shows a very wide variability between the rich and poor in this huge currency area. 


Economists are becoming increasingly pessimistic about the euro’s future and are already discussing how a country in severe difficulties may be allowed to leave in a managed way, rather than forced out by default. Roger Bootle (2012), who won the Wolfson Prize for a plan for such an eventually, has described the history of the euro as


“the failure of the greatest monetary experiment in history. The financial crisis made it worse but did not cause it. This failed experiment is condemning the Eurozone, which accounts for about a sixth of world GDP, to depression”


European leaders continue to meet in summit conference after summit conference, nervously contemplating fiscal union as a solution to the budget and debt problems. But it is not politicians, nor even economists, who will determine the Eurozone’s fate. If the financial markets perceive there is no long term solution to be found, they will finally turn against holding government debt from Eurozone nations, and the euro as a reserve currency. The verdict of the markets could then be quick and brutal.




Bootle R.  (2012) “The Daily Telegraph” – business section Monday Oct 15, 2012


Eurostat (2012) News Release Euro-indicators 62/2012 April 23 2012 “Provision of deficit and debt data for 2011”


Eurostat website


Gough J.   (2012) “The relative economic performance of Eurozone nations”  The Business Economist Vol 43 No. 2   p 6 – 16


Gough J (1997)  “Are the European economies really converging?”  The Business Economist  Vol 28 No. 2  p 10-13


James S. & Gough J. (2004) “The Economics and Politics of EMU”  in Political issues of the twenty first century (ed. Morland D & Cowling M)  Ashgate  p 161-192


Yeomans K.A. (1968) “Introducing Statistics” (Penguin) p 112-3





The standard deviation is the square root of the average of the summed squared deviations of each observation from the arithmetic mean.





s          is the standard deviation

xi          is an individual observation of series x

x’          is the mean value of the x series

n          is the number of observations in the series                 


and the coefficient of variation (CV) is the standard deviation expressed as a percentage of the mean


CV        =          100s/x’ 


We may now consider what value of the coefficient of variation is associated with a converged series. For this we need to make some assumptions about the tolerated variability of observations around the mean value. These are set out in the following table.



Inflation is set to converge on 2% which is the top of the ECB target range. Assume we allow a standard deviation of 0.5% around this central value of 2%. This would equate to a coefficient of variation of 25%


Applying the same logic to the budget deficit we allow a standard deviation of 0.5% around the mean maximum value of 3% of GDP, defined in the original convergence conditions. This would equate to a coefficient of variation of 16.6%


For total government debt the average value is set as 60% of GDP, as the maximum in the original convergence conditions. If we set a standard deviation of 5% around this central value this implies a coefficient of variation of 8.3%


For growth in GDP we assume a long term trend growth of 2% for the Eurozone, with a standard deviation of 0.5% around this central value. This would equate to a coefficient of variation of 25%


Full employment is likely to be associated with an unemployment rate of about 5%, and we assume a standard deviation of 1% around this central value. This would imply a coefficient of variation of 20%



It is recognised that the above assumptions are open to debate, but they do give us a guide to the values of the coefficient of variation which are associated with convergence around the central values. The value of 25% or less in the above table gives us a benchmark to judge the actual results of Eurozone nations over the last twelve years.


In fact none of the calculated coefficients get as low as 25%, and only in the inflation data do they get near that level. In most other series the value of the CV exceeds 40%, and in many cases considerably higher than this, sometimes well in excess of 100%. The overall picture is one of lack of convergence right across the Eurozone for nearly all of the relevant series, with the exception of inflation up to the global recession and financial crisis in 2007.