Svatopluk Kapounek

Long-Run Heterogeneity Across the EU Countries

This chapter contributes to the OCA endogeneity hypothesis and emphasises the EU countries’ changes in economic growth related to the main milestones of the European Integration Process. Our multiple-steady-state approach substitutes for capital thresholds by euro adoption. Thus, we suppose two specific steady states for two groups of countries: (1) euro member states; and (2) non-member states. We discuss continuously increasing heterogeneity over the long-run in single-currency regimes and identify the limits of single-policy and regulatory-framework efficiency. Moreover, the single regulatory framework causes excessive restrictions in the countries with lower productivity and capital formation and simultaneously, weak regulation in countries with higher levels of potential growth. Consequently, the negative effects of excessive restrictions are not balanced by expansionary policy because over the long term, economic growth is much more sensitive to restrictions. Finally we conclude that heterogeneity undermines the potential economic growth in Europe as a whole.