Convergence in Per Capita Income Levels, Productivity Dynamics and Real Exchange Rates in the EU Acceding Countries

During a catch up process - such as the one that the countries acceding to the EU are undergoing - there emerges a fundamental economic link between nominal and real variables which surfaces in the dynamics of the real exchange rate (the "Balassa-Samuelson effect"). This article analyzes some of the implications of this process for the acceding countries addressing three main issues. First it focuses on the empirical measurement of convergence between acceding countries and EU-member states. Then it analyzes the economic fundamentals of a catch up process arguing that for this process to be self-sustained, it must be based on differential productivity growth whereby productivity in the acceding countries grows faster than that in the incumbents. Thirdly, an attempt is made to test empirically the Balassa-Samuelson effect in the EU acceding countries. Finally the article discusses some of the policy implications of the dichotomy "real-cum-nominal convergence" on the way to EU and EMU accession. [PUBLICATION ABSTRACT]