Is there clustering among the Eurozone economies? Evidence from how the EU's New Member States are converging

Optimal Currency Area theory stresses the importance of the co-movement of business cycles among Eurozone member states for a successful common currency. In this paper, we show how to decompose economic cycles in a time-frequency framework in order to compare the coherences and phase shifts for Hungary, Poland, Czech Republic, Germany and France. We find that there has been some convergence on the Eurozone economy at short cycle lengths, but little convergence in long cycles. We argue that this shows evidence of divergence in the Eurozone into two groups: a German cluster and the periphery economies.