Leaving aside differences across countries, a long and challenging process of economic transformation brought countries in the region significant improvements in incomes and living standards. Full membership of the EU – or the prospects of accession – provided an important stimulus for the process of transformation as well as an anchor of stability. In Western Europe, completion of the three stages of EMU led to the establishment of the European Central Bank (ECB) and the introduction of the euro in January 1999. Having started originally with 11 participating countries, the euro area has since expanded to include 17 EU Member States including some previous transition economies, namely Estonia, Slovenia and Slovakia. The changes Europe has seen over these past 20 years are enormous. Equally enormous have been the challenges along the way, not least of course due to the global financial crisis. But there have also been enormous achievements. In my remarks today, I would like to take stock of some of those achievements and focus on three main aspects of the process of economic convergence in Central and Eastern Europe. BIS central bankers’ speeches  1  Three main aspects of the process of economic convergence 1. Nominal and real convergence: what has been achieved? The first aspect of convergence relates to developments in terms of nominal and real convergence between the countries of Central and Eastern Europe and the euro area.
Looking at the region as a whole, after some very difficult years, inflation has come down dramatically from very high levels at the beginning of transition to single-digit levels today. Long-term interest rates have also fallen substantially, reflecting the gradual anchoring of inflation expectations. The countries of the region have also made remarkable progress in terms of institutional and structural convergence. In particular, we have witnessed the building of appropriate institutions, increased trade integration with the euro area and improvements in the business environment. Naturally, this progress has been reflected in per capita income convergence. Over the last 20 years, per capita income has risen to an average of 63% of the EU average if adjusted in terms of Purchasing Power Parity (PPP). But combining low inflation with real convergence has posed a serious challenge in many countries. Let me elaborate on this. The very process of real convergence entails upward pressures on prices, which can be hard to avoid in terms of both relative prices and the overall price level. Among other things, these pressures stem from high productivity growth as well as the processes of price liberalization and tax harmonization. Price increases related to productivity growth are usually referred to as the BalassaSamuelson effect. But most studies have found this effect to be relatively limited.1 Convergence in price levels, which stood on average at two thirds of the EU average in 2010, seems to have surpassed convergence in income levels in all countries of the region.