Testing the Endogeneity of Trade and Financial Integration and Sectoral Specialization in an Enlarged Euro Area

In this study we analyzed the trade, financial and structural asymmetries between the core and periphery of the Euro Area, and between these countries and seven CEE economies, respectively. The study includes an investigation of the trade, financial integration and sectoral specialization transmission channels on the business cycle synchronization for 16 EU countries between 1998 and 2011. In order to test the endogeneity of the four variables, we used the three-stage least squares method for a simultaneous equations system. According to the results, we identified three arguments for endogeneity in an enlarged Euro Area with other CEE economies. Thus, most of the CEE economies recorded a higher correlation of the business cycles and a higher share of the intra-industry trade with the Euro Area advanced countries as compared to Portugal or Greece. Moreover, the group of the CEE economies is more commercially integrated as compared to the peripheral economies of the Euro Area. Also, the sectoral changes in the New Member States show a process of structural convergence with the advanced economies of the Euro Area core.