There are, by and large, no borrowing constraints as countries are bound by what is called the acquis communautaire, in other words, all the laws and agreements, including the treaties that apply in the EU. Perhaps what is more important, they have implemented banking sector reforms that have led to an increase in banking competition.
4 So in the case of the European Union the theory works. Another element of the theory which seems to be working to some extent is the BalassaSamuelson effect, which contributes to a real exchange rate appreciation in East.