External asymmetries in the euro area and the role of foreign direct investment

Nicos Christodoulakis and Vassilis Sarantides
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Vassilis Sarantides: Athens University of Economics and Business

No 132, Working Papers from Bank of Greece

Abstract: A few years after the establishment of the European Economic and Monetary Union (EMU), large asymmetries emerged in the trade balances and the current accounts of the member-states. A divide seems to separate two groups in the euro area, one with the northern countries achieving external surpluses and the other including the southern countries with large external deficits. We argue that a crucial factor in shaping productivity, and consequently affecting competitiveness and the external position of the economy, is the size and composition of Foreign Direct Investment (FDI) and find that the northern countries received more total FDI than the southern group. Moreover, the southern countries attracted more investment in real estate rather than the productive sector. Focusing on ten euro area economies over the period 1980-2009, we establish a positive relationship between FDI flows and trade balances in the northern countries, in contrast to a negative one for the southern group. Using industry-level data, we also establish a positive (negative) long-run relationship between FDI in the manufacturing (non-manufacturing) sector and the trade balance for the northern (southern) countries.

Keywords: Euro area; trade balance; Foreign Direct Investment (FDI) (search for similar items in EconPapers)
JEL-codes: F15 F21 (search for similar items in EconPapers)
Pages: 51
Date: 2011-06
New Economics Papers: this item is included in nep-eec, nep-int and nep-mon
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Citations: View citations in EconPapers (6)

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Journal Article: External Asymmetries in the Euro Area and the Role of Foreign Direct Investment (2017)
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