Empirical evidence on the determinants of economic growth in the European Union : what effects of integration?

Abstract

　The European Union is recently suffering from problems of persistently low growth as well as anti-EU and populistic movements that capitalise from the economic discontent. This paper, thus, checks for the impact of the European integration on the economic growth in the EU countries, controlling for other determinants, and differencing also between the old and new member states. First, the integration index and its sub-indices for trade in goods, trade in services, FDI, portfolio, and migration are estimated using the principal components analysis to illustrate the state of integration in the European Union and its member states. Next, we use the estimated index and sub-indices in the growth regressions to analyse their impact on growth in GDP per capita in the EU countries.

　The estimated index shows slight upward trend in years 2006-2018 indicating that the integration process in still ongoing and the sub-indices point at the fastest increase in integration in areas of trade in services and migration. The growth regressions imply that higher level of integration is associated with higher growth rates but this relationship seems to hold especially in countries that joined the EU since 2004, implying the convergence-stimulating impact of European integration. At the same time, the increase in the index has negative impact in the non-CEE countries.

　The positive impacts of integration in the CEE countries come mostly from trade in goods and services. The countries are, however, negatively affected by level of migration and change in portfolio flows. The negative impact in the old member states seems to stem from trade in services and migration. The results on migration and trade in services, together with robustness checks that show no negative impact for migration with the rest of the world, imply that free movement of labour in the EU might be unsustainable, given the existing differences in wages, labour conditions, or work opportunities across the member states. The strong negative impact of portfolio flows, with positive impact for flows with the ROW, leaves also questions on financial integration in the EU.

　The results provide thus some worrying observations on the effects of European integration, calling for further analysis of its impacts and their reasons, and for policies that would mitigate the negative effects and maximize the positive ones.