Chapter 7 Sources of European Growth Externalities: A Two-Step Approach

Purpose: Following the theoretical literature on growth model with externalities, the chapter aims at finding empirical evidence of the main sources of economic interdependencies in Europe. Methodology/approach: A two-step econometric procedure is adopted. In the first step, in order to evaluate growth spillovers in Europe, cointegration relationships between indexes of industrial production per capita are estimated for 15 European countries. The estimated coefficients, interpreted as long-run elasticities between European countries, appear to be different between countries and unstable over time. In the second step, these coefficients are explained by trade, specialization, research and development (R&D), and macroeconomic variables. Findings: Panel estimations show strong evidence in favor of a positive relationship between openness, country size, knowledge accumulation, and the long-run sensitivity to European income. European income spillovers are not explained by the specialization of trade and production. We conclude that countries that benefit the most from economic integration are the largest and those that invest the most in R&D. Originality/value of chapter: The two-step approach adopted in this chapter is original and allows for measuring the impact of various determinants of externalities at the same time.