CREDIBILITY OF EUROPEAN ECONOMIC CONVERGENCE

The authors analyze economic convergence and its relation to European real interest rate differentials using a clustering method on seven ma croeconomic key variables for 1979-1995. The results indicate that mon etary convergence has progressed considerably but that there is hardly any real convergence in the EU. They also perform pooled nominal and real interest rate regressions with the individual cluster indicators as explanatory variables. The authors find significant positive effect s of external (current account) and internal (unemployment ratios, gov ernment finance) imbalances on real interest rates. They also group co untries according to economic reputation and find that real indicators remain significant for the high-reputation countries.