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

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  • Nicos Christodoulakis

    (Athens University of Economics and Business)

  • Vassilis Sarantides

    (Athens University of Economics and Business)

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.

Suggested Citation

  • Nicos Christodoulakis & Vassilis Sarantides, 2011. "External asymmetries in the euro area and the role of foreign direct investment," Working Papers 132, Bank of Greece.
  • Handle: RePEc:bog:wpaper:132
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    References listed on IDEAS

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    Cited by:

    1. Christodoulakis, Nicos & Leventi, Chrysa & Matsaganis, Manos & Monastiriotis, Vassilis, 2011. "The Greek crisis in focus: austerity, recession and paths to recovery," LSE Research Online Documents on Economics 38380, London School of Economics and Political Science, LSE Library.
    2. Randolph Bruno & Nauro Campos & Saul Estrin & Meng Tian, 2016. "Foreign Direct Investment and the Relationship Between the United Kingdom and the European Union," CEP Discussion Papers dp1453, Centre for Economic Performance, LSE.
    3. Jože Damijan & Črt Kostevc & Matija Rojec, 2015. "Bright past, shady future? Past and potential future export performance of CEE countries in a comparative perspective," Post-Communist Economies, Taylor & Francis Journals, pages 306-335.
    4. repec:spr:portec:v:16:y:2017:i:1:d:10.1007_s10258-016-0126-5 is not listed on IDEAS

    More about this item

    Keywords

    Euro area; trade balance; Foreign Direct Investment (FDI);

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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