Adopting the Euro in New Member States With Special Reference to Cyprus

Despite considerable progress regarding Mew Member States’ (NMS) nominal convergence with Euro-zone countries, the record is more mixed regarding real/structural convergence. At the same time, almost all NMS face the additional challenge of combining economic and monetary integration with the EU with domestic goals for economic development and growth. In this paper, we examine divergence and convergence, real and structural, in the European Union with respect to the NMS as they seek to adopt the Euro paying special attention to Cyprus. We examine real convergence especially in terms of growth, output gaps, labour productivity and prices, and structural adjustment in terms of output and employment shares. Doing, so we draw on earlier work in the literature and extend the analysis in terms of a composite ‘relative productivity’ indicator that incorporates both output and employment shares. We discuss antidotes to asymmetric shocks such as labour market flexibility and trade integration.