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Is Europe disintegrating? Macroeconomic divergence, structural polarization, trade and fragility

Author

Listed:
  • Claudius Gräbner
  • Philipp Heimberger
  • Jakob Kapeller
  • Bernhard Schütz

Abstract

This paper analyses economic developments in the Eurozone since its inception in 1999. In doing so, we document a process of economic divergence and polarization among those countries that joined the Eurozone during its first two years, which fits a typical ‘core – periphery’ pattern. We show how this polarization process first manifested in increasing current account imbalances before the crisis, before it translated unto the level of general macroeconomic development after the crisis. Empirically, we demonstrate how this divergence is tied to a ‘structural polarization’ in terms of the sectoral composition of Eurozone countries: specifically, the emergence of export-driven growth in core countries and debt-driven growth in the European periphery coincides with differences in technological capabilities and firm performance. Pushing for convergence within Europe requires the implementation of three intertwined policy programs: macroprudential financial regulation, active industrial policies aiming at a technological catch-up process in periphery countries, and progressive redistributional policies to sustain adequate levels of aggregate demand throughout the Eurozone.

Suggested Citation

  • Claudius Gräbner & Philipp Heimberger & Jakob Kapeller & Bernhard Schütz, 2017. "Is Europe disintegrating? Macroeconomic divergence, structural polarization, trade and fragility," Economics working papers 2017-15, Department of Economics, Johannes Kepler University Linz, Austria.
  • Handle: RePEc:jku:econwp:2017_15
    Note: English
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    Keywords

    polarization; European Monetary Union; industrial policy; financial regulation; growth trajectories;

    JEL classification:

    • B5 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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