Debt and convergence: Evidence from the EU member states

Abstract We look at the effects of indebtedness on convergence among the EU member states. Higher total, public, and private debt ratios are associated with slower rates of convergence. The estimated convergence slowdown is stronger for public debt compared to private debt. This disparity could reflect inefficiencies and crowding out effects of government debt. It could also reflect the possibility that higher public debt ratios exacerbate the effects of private debt on convergence during financial crises because they constrain the governments’ ability to pursue stabilization policies. Implied rates of convergence show that convergence may stop at very high debt levels.