Reproduction permitted only if source is stated.ISBN 978-3-86558-941-5 (Printversion) Non-technical summary Western European countries took major steps toward economic integration in recent decades, including the liberalization of capital and labor markets and the foundation of the European Economic and Monetary Union (EMU). The 1992 Maastricht Treaty set an agenda for macroeconomic convergence prior to entering the monetary union, and the European Commission has put forward numerous policy initiatives aimed at the reduction of regional economic disparities and improving competitiveness among EU members. Meanwhile, in Central and Eastern European countries (CEEC) important political and institutional changes were undertaken in the 1990s. These involved sizable macroeconomic adjustment processes, e.g., transition from planned to market economy, liberalization of prices, and privatization of state assets.Starting from the hypothesis that closer economic integration between countries may lead to increased real income per capita convergence, this paper investigates convergence in real incomes per person between the 27 current member states of the EU for the time horizon 1970-2010. We employ an empirical convergence test derived from a neoclassical growth model augmented with endogenous technological progress which differs across countries and over time. The model implies that the transition path of each economy toward the steady state level of per capita real income depends on country-specific technological growth rates. This approach enables us to study various types of economic transition behavior, e.g., temporary divergence followed by catching-up and convergence. In addition, the convergence test is applied in an iterative manner in order to identify convergent country groups, or so-called 'convergence clubs'.Our results offer important insights on the economic catch-up exhibited by the new EU members in light of the institutional changes and macroeconomic adjustment processes experienced in recent decades. The main results can be summarized as follows. We do not find overall real income per capita convergence in the EU. This result is robust to any time horizon considered. Instead, we discover country groups that converge to different income levels in the long-run. Regional linkages seem to play a significant role in determining the formation of convergence clubs. Yet, eurozone countries belong to distinct subgroups, thus clustering is not necessarily related to EMU membership. Moreover, there is a clear separation between the CEEC and the old EU members in the long run, suggesting that, even though the CEEC have exhibited higher real income growth than the EU average over the last 40 years, catching up was not sufficient in order to eliminate cross-country real income per capita differences. Finally, we observe a South-East vs. North-West division of European economies by the mid-nineties.Our results draw attention to the lack of growth-enhancing structural reforms in EU countries, posing a threat to the achi...

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for their valuable comments and suggestions. Furthermore, I am grateful to Yuriy Gorodnichenko for kindly sharing the data on government spending forecast errors. This paper was partly written while visiting the Associate Directorate General Economics and Research and the Associate Directorate General International Affairs of the Banco de España. The views expressed in this paper are those of the author and do not necessarily reflect the views of the Banco de España. All remaining errors are my own.

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