Regional fluctuations and national cohesion in the EU12: a pre-Maastricht assessment

This work studies regional aÌ uctuations in the EU12 focusing on regional Gross Domestic Product (GDP) and Employment dynamics over the period 1977-95. The econometric framework is a combination of the Structural Dynamic Factor Model by Forni and Reichlin (1998) and the Dynamic Factor Model by Forni and Reichlin (2001), where each regional variable is decomposed into three orthogonal components, driven by European, national and local shocks. Here we assess the relative importance of the common shocks and provide a Örst attempt to identify the nature of the common drivers across regions in Europe. According to the model, regions are more synchronized in terms of GDP than in terms of Employment dynamics, and the most cohesive part of Europe does not include all the Old-Europe regions. The possibility of within-country dichotomous behaviours supports a two-level European integration policy, that both fosters the integration process of the less synchronized countries and promotes policies aimed to reduce actual and potential inner dichotomies in high-integrated ones.