The Impact of Russo-Ukrainian War on the EMU Convergence: Did National Energy Subsidies and Fiscal Transfers Help?

Abstract

The Russo-Ukrainian War caused energy prices to soar, without decreasing European reliance on liquid natural gas from Russia. Furthermore, the higher energy prices compared to the prewar period compelled richer countries to increase energy subsidies without EU permission. This, in turn, could lead to divergence in inflation, economic performance, and government bond yields within the EMU. IMF warned that the stability of EMU was under threat, which implies the monetary union would be exposed to the same dangers as before the onset of the sovereign bond crisis in 2010-15. This study analyzes whether the EMU is facing such dangers, utilizing the sigma convergence approach proposed by Phillip and Sul (2007) and panel estimation. This method provides more precise indications of economic symmetry than traditional unit root tests, allowing for clearer policy implications. Empirical analysis suggests that, so far, the EMU has not faced the danger of divergence. However, unilateral energy subsidies without coordination could be a key determinant affecting government bond yield spreads.