Synchronization patterns in the European Union
Abstract
We propose a novel approach to investigate the synchronization of business cycles and we apply it to a Eurostat
database of manufacturing industrial production time-series in the European Union (EU) over the 2000-2017 period.
Our approach exploits Random Matrix Theory and extracts the latent information contained in a balanced panel data
by cleaning it from possible spurious correlation. We employ this method to study the synchronization among
different countries over time. Our empirical exercise tracks the evolution of the European synchronization patterns
and identifies the emergence of synchronization clusters among different EU economies. We find that
synchronization in the Euro Area increased during the first decade of the century and that it reached a peak during
the Great Recession period. It then decreased in the aftermath of the crisis, reverting to the levels observable at the
beginning of the 21st century. Second, we show that the asynchronous business cycle dynamics at the beginning
of the century was structured along a East-West axis, with eastern European countries having a diverging business
cycle dynamics with respect to their western partners. The recession brought about a structural transformation of
business cycles co-movements in Europe. Nowadays the divide can be identified along the North vs. South axis.
This recent surge in asynchronization might be harmful for the European Unio because it implies countries’
heterogeneous responses to common policies.
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