Speed of convergence and relocation: New EU member countries catching up with the old

Economic convergence of the new member countries (NMCs) of the EU towards the incumbent EU countries (EU-15), not only in terms of real income, but also in nominal terms, is of paramount importance for both partners. We build a dynamic CGE model, starting from the Balassa-Samuelson two-sector framework, but modify and enlarge it with, i.a., endogenous capital formation, consumption behaviour and labour mobility to address several other issues like uncertainty, welfare and sustainability in terms of foreign indebtedness. At the same time we evaluate, by endogenising FDI flows, what impact convergence has on the EU-15 and what is the interaction between the two regions through FDI. We find that in a general equilibrium setting fears of adverse effects of a relocation of EU-15 manufacturing to the NMCs are not well founded.