This paper analyzes the effects of European Monetary Union (EMU) on regional convergence. First information is provided about the magnitude and the evolution of regional disparities. Subsequently, the relation between economic integration and long run regional convergence is discussed. Third, regional convergence is shown to be dependent on flexible regional adjustment to changing economic conditions. In the transition to and in the final stage of EMU sufficient regional wage flexibility will be requires to cope with adverse economic shocks. The last part of the paper estimates the reponse or regional labor income to region‐shape and national shocks.

This paper investigates the simultaneous impact of sub-national tax autonomy and vertical transfers on regional disparities of GDP per head in a sample of 30 OECD countries over the period 1995-2011. Autonomously raised tax revenue as well as vertical transfers are shown to be potential drivers of regional convergence, although the negative marginal impact of transfers on disparities decreases and eventually turns positive as sub-national governments are more transfer dependent. The results indicate that sub-national tax autonomy should be sufficiently broad to allow less developed regions to expand their own revenue base and to catch up with their more developed counterparts.

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