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Regional output growth synchronisation with the Euro Area

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Abstract

This paper investigates the patterns and determinants of the co-movement of economic activity between regions in the European Union and the Euro Area. We use a panel dataset of 208 regions over the period 1989–2002 and estimate a system of simultaneous equations to analyse the impact of regional trade integration, industry specialisation and exchange rate volatility on regional output growth synchronisation with the Euro Area. We find that deeper trade integration with the Euro Area had a strong direct positive effect on the synchronisation of regional output growth with the Euro Area. Industrial specialisation and exchange rate volatility were sources of cyclical divergence. Industrial specialisation had however an indirect positive effect on regional output growth synchronisation via its positive effect on trade integration, while exchange rate volatility had an indirect additional negative effect on regional output growth synchronisation by reducing trade integration.

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Notes

  1. See Haan et al. (2008) for a review of recent research on the synchronisation of business cycles in the European Economic and Monetary Union and its underlying factors.

  2. The analysed regions are classified as NUTS 2 regions according to the Nomenclature of Territorial Units for Statistics (NUTS) of the EUROSTAT—the statistical office of the European Union.

  3. Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, United Kingdom.

  4. Quarterly data is not available at regional level. Furthermore, as pointed out by Giannone et al. (2009) annual data is less affected by measurement error in comparison to quarterly data.

  5. Classified according to NACE at 2 digit level: mining and energy; food, beverages, tobacco; textiles and clothing; fuels, chemicals, rubber and plastic products; electronics; transport equipment; other manufacturing.

  6. The members of the European Union as of 1992: Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, United Kingdom.

  7. Trade may also have an effect on the exchange rate volatility since economies which trade intensively with each other have similar consumption baskets and a price increase in a particular product will be passed to the trading partner so that the real exchange rate remains unchanged (Broda and Romalis 2009). Since our trade data refers to the regional level and the exchange rate volatility to the national level we cannot estimate this potentially indirect relationship.

  8. Using averages of output growth over 5 years has the advantage to avoid an incorrect classification of leading or lagging behaviour of outliers as a missed co-movement of economic activity. We thank one anonymous referee for suggesting this point to us.

  9. See Giannone et al. (2009) for a discussion of this argument. They also point out that annual data is less affected by measurement error in comparison to quarterly statistics.

  10. NUTS 2 regions in Austria, Belgium, France, Finland, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.

  11. NUTS 2 regions in Denmark, Sweden, and the United Kingdom.

  12. Imbs (2004) estimates a model of four simultaneous equations to identify the direct and indirect effects of trade intensity, industrial specialisation and financial integration on business cycle correlations using a cross section of 22 OECD countries. In contrast to Imbs, we use a panel data model allowing for time invariant unobserved region fixed effects and time-specific common shocks.

  13. Imbs and Wacziarg (2003) discuss this literature strand.

  14. The average regional output growth synchronisation with the Euro Area has increased in all countries with the exception of Greece, Spain, Ireland, Austria and Sweden. Output growth correlations with the Euro Area have decreased in 71 regions, one third of the regions included in our analysis.

  15. The hypothesis of joint equality of time invariant unobserved region characteristics effects in the pre-EMU and EMU periods is rejected by the corresponding F test: F(208, 6022) = 2.69, Prob > F = 0.000.

  16. F(12, 8294) = 56.95, Prob > F = 0.0000.

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Acknowledgments

We thank Ray Barrell, Fritz Breuss, David Bell, Xiaoheng Zhang, Konstantinos Angeloupoulos, two anonymous referees and participants at the Congress of the European Regional Science Association in Amsterdam, the Irish Economics Association Conference in Bunclody, the EUROFRAME Conference in Berlin, and the European Trade Study Group Conference in Vienna for helpful comments and suggestions. Iulia Siedschlag gratefully acknowledges financial support from the 5th RTD Framework Programme of the European Communities (Contract No. HPSE-CT-2002-00118).

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Authors and Affiliations

  1. The Economic and Social Research Institute, Dublin, Ireland

    Iulia Siedschlag

  2. Research Institute For European Affairs, Vienna University of Economics and Business, Vienna, Austria

    Gabriele Tondl

Authors
  1. Iulia Siedschlag
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Correspondence to Gabriele Tondl.

Appendix: Variable definitions and data sources

Appendix: Variable definitions and data sources

1.1 CORRY: regional output growth synchronisation with the Euro Area

Pearson correlations of annual growth rates of real regional gross value added and Euro Area real gross value added computed over 5-year rolling windows. Data on real gross value added is taken from the European Regional Database, Cambridge Econometrics. To account for the fact that while this variable takes values between −1 and 1, the independent variables are not bound, we use in regressions the following transformed variable: \( {\text{CORRY}}_{it}^{*} = \frac{1}{2}\ln \left( {{\frac{{1\,+\,{\text{CORRY}}_{it} }}{{1 \,-\, {\text{CORRY}}_{it} }}}} \right) \) as suggested by Inklaar et al. (2008).

1.2 SPEC: industrial specialisation index

The industrial specialisation index is computed using regional gross value added disaggregated on the following seven NACE 2 digit industry sectors: mining and energy; food, beverages and tobacco; textiles and clothing; fuels, chemicals, rubber and plastic products; electronics; transport equipment; other manufacturing. The specialisation index for region i is defined as follows: \( {\text{SPEC}}_{i} = \sum\nolimits_{j = 0}^{N} \vert {s_{ij} - s_{{{\text{Euro}},j}} }\vert. \) s ij is the share of sector j in region i and s Euro,j is the share of sector j in the Euro Area. This index takes values from 0 to 2. A value equal to 0 indicates complete similarity of industrial structure, and a value equal to 2 indicates total specialisation. The variable is included in regressions in logs. Data is taken from the European Regional Database, Cambridge Econometrics.

1.3 TRADE: regional exports to the Euro Area as share of gross value added

Total exports of each region to the Euro Area are estimated using NACE two-digit national exports provided by the WIFO-World Trade Databank (based on UN Trade Statistics) and NACE two-digit regional gross value added from the European Regional Database, Cambridge Econometrics. National exports of a product sector j are allocated to regions using the share of each region in the gross value added of sector j in total national gross value added. Total regional exports is then the sum of exports in all sectors j,…,N.

1.4 EVAR: exchange rate volatility

Exchange rate volatility is proxied by the standard deviation of the first difference of the log of the exchange rate index over five years corresponding to the rolling windows of the growth cycles. We use monthly nominal market exchange rates of national currencies per unit of Ecu/Euro from the IMF’s International Financial Statistics.

1.5 GDP SUM: log of product of per capita real regional value added and per capita Euro Area real gross value added

Regional real gross value added per capita from the European Regional Database, Cambridge Econometrics.

1.6 GDP GAP: log of the ratio of a region’s per capita real gross value added and Euro Area per capita real gross value added

Regional real gross value added per capita is taken from the European Regional Database, Cambridge Econometrics. Cambridge Econometrics. GAP > 0 for regions with per capita gross value added greater than the Euro Area aggregate; GAP < 0 for regions with per capita gross value added lower than the Euro Area aggregate.

1.7 POP: log of regional population in persons

Population in thousand persons from the European Regional Database, Cambridge Econometrics.

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Siedschlag, I., Tondl, G. Regional output growth synchronisation with the Euro Area. Empirica 38, 203–221 (2011). https://doi.org/10.1007/s10663-010-9130-7

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