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Although it is agreed that the dual development of monetary integration and territorial enlargement are likely to generate profound effects on European spatial structure, in both West and East, much uncertainty centres around the question of what changes will be brought about. This book furthers our economic understanding of the opportunities and challenges offered by these developments. The emphasis is primarily on the economic agenda associated with European integration. Part A reviews the debate on European monetary unification. Economic integration raises many issues, one which is dealt in depth is the issue of convergence versus divergence. Part B centres around the dynamics of cohesion in the EU and the associated regional policies, reflecting on experience from the past and challenges for the future. Part C sheds some light on the complexities of transition and integration of Central and Eastern European countries, the second major challenge being faced by the EU at the turn of the century.



Spatial Dynamics of European Economic Integration: Prologue

1. Spatial Dynamics of European Economic Integration: Prologue

The process of economic integration within Europe is a highly complex and multi-faceted phenomenon. There is little doubt, however, that the European Community has made persistent efforts to encourage the widening (territorial enlargement) and deepening (increasing the integration of existing member countries) of the integration process. This was true of the first territorial enlargement in the 1970s, and is even more so in the 1980s and 1990s, when the Community decided, ambitiously, to enlarge and deepen at the same time.
Manfred M. Fischer, Peter Nijkamp

European Monetary Unification and Implications


2. Winners and Losers in the European Monetary Union

A Neural Network Analysis of Industrial Spatial Shifts
European integration is not a single and simple event taking place at one moment in time, but a long lasting evolutionary process with many ups and downs (see for an interesting survey Jones 1996 and Swann 1996). The first integration plans date back to the early post-war period, whereas the future development of European integration is likely to stretch far into the next century. European integration encompasses more than market integration; it also incorporates social, political, technological and monetary harmonisation. After the completion of the internal market and the steps towards opening up European economic space towards Central and Eastern Europe, much debate has in recent years centred around the challenge of transforming the European Monetary System (EMS) into the Economic and Monetary Union (EMU) (see e.g. Loureiro 1996). The EMS — already some twenty years in existence — was put in operation to ensure monetary stability in European Community countries and acted as a ‘laboratory experiment’ which might lead to complete European monetary unification. Such an integrated financial market would favour economic efficiency and would discourage national exchange rate policies aiming to achieve self-centred country-specific economic goals, while some financial discipline would be imposed on high-inflation countries (see Eichengreen et al. 1995; De Grauwe 1994; Kenen 1995).
Peter Nijkamp, Shunli Wang

3. Costs of European Monetary Union: Evidence of Monetary and Fiscal Policy Effectiveness

In general, there are two different ways of looking at the costs of a monetary union. Firstly, given the low inter-regional labour mobility in the European Union, whether the benefits of a common currency outweigh costs depends strongly on the degree of asymmetry of real shocks (Mundell 1961). If shocks are affecting countries that fail to meet the flexibility requirements, it would be better for those countries to have the possibility of resorting to the exchange rate instrument to adjust. A common currency may be preferable, however, if the countries are mainly affected by asymmetric money and financial market shocks. In Stage III of the European monetary union, speculative attacks, time-varying risk premia and currency substitution which could cause macroeconomic imbalances will disappear. Many empirical studies deal with the issue of whether the EU-15 are an optimum currency area. Some of these also include considerations about the likelihood of the emergence of new asymmetries in the future monetary union or the decreasing importance of asymmetries compared to the EMS.1
Helene Schuberth, Gert D. Wehinger

4. Specialisation in Europe and Asymmetric Shocks: Potential Risks of EMU

In recent years, various studies have focused on the effects of European Integration and Monetary Unification, especially the convergence-divergence debate. The creation of the Euro Zone (eleven countries with three hundred million inhabitants and approximately a fifth of the world’s GDP and trade) establishes a new economic framework of price stability and growth, but its probable repercussion on convergence is as yet unclear.
Raúl Ramos, Miquel Clar, Jordi Suriñach

5. The Regional Impact of the Single Currency

At the beginning of May, 1998, the Council decided that 11 member states of the European Union (EU) would participate in the single currency as of 1 January 1999. Among the participants are countries economically as different as Germany and Portugal, including poorer regions — in terms of GDP per capita relative to the EU15 average — such as Mecklenburg-Vorpommern and Açores, as well as richer regions, such as Hamburg and Lisbon. This gives rise to the question of whether the impact of the euro will vary between regions of different countries, i.e. between German and Portuguese regions, or rather between types of regions, i.e. between richer regions and poorer regions. This is not a purely academic question because, depending on the answer, it could have important policy implications for the design of regional policy at national and EU level.
Martin Hallet

6. Trade and Investments in the EMU Regions

The regional effects of EMU have been virtually ignored in the EMU Manifesto1, yet the regional effects of a monetary union have always appeared to be rather important, except to international economists who always have made the assumption that ‘place prosperity’ implicitly identifies with ‘people prosperity’. It was probably Edgar Hoover (1971) in his Introduction to Regional Economics who first called into question the identification of ‘place’ with ‘people’ prosperity. When dealing with separate national economies, it is reasonable to assume that national governments can implement regional equalisation policies, but in a monetary union like EMU things could be very different. In the countries admitted to the club, national governments have fewer policy instruments than before. This means the risk of the unequal sharing of benefits breaking the identity between ‘place’ and ‘people’ at community and national level as well.
Dino Martellato

7. Convergence of European Financial Systems: Banks or Equity Markets?

Recent literature draws a distinction between Anglo-Saxon (capital market oriented) financial systems, as represented by the UK, and Continental (banking oriented) financial systems, as typified by Germany (Doukas, Murinde and Wihlborg 1998). It is useful, however, to note that in a conventional sense the term ‘banking’ involves bank lending via the creation of demand deposits in connection with a debt contract between the bank and the borrower, deposit taking and the provision of associated money transmission services to the public. Nevertheless, banks, especially in the European Union, are increasingly engaging in both banking and securities business, i.e. universal banking, fund management and, more recently, insurance business (‘bancassurance’ or ‘Allfinance’). The expression ‘bank oriented’ may therefore have various interpretations. It can mean a system in which banks are the dominant institutions providing both indirect finance (or intermediated debt) and access to direct finance from the money and capital markets via instruments such as commercial bills and paper (money market debt finance), bonds and Euro-notes (capital market debt finance) or shares (capital market equity finance), inter alia. The key distinctions here are between direct and indirect finance and between debt and equity financing. But since banking fundamentally involves the provision of indirect finance, ‘bank oriented’ could also be taken more narrowly to mean that the most important source of external financing for non-financial companies (NFCs) is bank loans.
Victor Murinde, Juda Agung, Andy Mullineux

Economic Integration, Cohesion and Regional Policy


8. The Dynamics of Economic Integration and Cohesion in the EU: Experience from the Past and Challenges for the Future

In the past the European Union has shown a remarkable dynamism. This is first reflected in indicators of market and policy integration (deepening of the process). It is next reflected in the increased number of countries that have become members of the EU (widening of the process). It is likely that this dynamism of the past will be continued in the future. There are certainly new challenges ahead. In matters of deepening, these include the successful implementation of the Economic and Monetary Union. In matters of widening, there is the task of the integration of the Central and Eastern European countries.
Willem Molle

9. The Control of Regional State Aid under EU Competition Policy and Its Effects on Economic and Social Cohesion

Most European countries had developed their own regional policies before the beginning of the integration process of the European Union (EU). These policies remain and therefore co-exist with the community regional policy developed by the Structural Funds.
Carmen Benavides, Margarita Argüelles

10. On-Going European Integration and the Position of the Regions: An Analysis of the Process and Some Possible Future Scenarios

The European Union is facing a number of very important challenges. Some of the most important in the near future are certainly its enlargement and the establishment of economic and monetary union. These challenges, however, are not the only ones. Every step towards further integration has implications on several levels. For example, the position of the regions, which are sometimes considered the basic units of the Union, will undoubtedly be affected by this integration process. In fact, it is impossible to evaluate the role of the regions without taking European integration into consideration, as their meaning and future is so strongly dependent on the process.
Hendrik Vos

11. Convergence, Dualism and Regional Disparities: The Italian Case

The debate on convergence of regions and states in Europe has recently been boosted both by historical events (the EU integration process, the reunification of Germany and the CEE transition process) and by renewed interest in the mechanisms of economic growth. This interest has been stimulated by new approaches emphasising endogenous growth and by the theory of the location process (see Krugman 1995). The main question concerns whether or not a ‘catching-up’ process is in progress, and also the nature of the transition pattern.
Stefano Casini Benvenuti, Alessandro Cavalieri, Renato Paniccià

12. Capital and Labour Productivity Convergence of Manufacturing Industry in the Regions of Greece

Given that spatially uneven industrial growth is a prime topic in economic geography, it is surprising that changing regional productivity is a relatively understudied area. Geographers seem to be more interested in the dynamics of the unequal distribution of the factors of production (labour and capital) than in the regional inequalities of their productive use. However, there are clear signs that this has started to change. In the field of regional science, at least, there is a proliferation of studies focused on productivity growth and the factors that affect it in a variety of regional contexts. Apart from the numerous US studies (a detailed review is offered by Gerking 1994), mention can be made of the studies of Chen (1996) in Chinese regions, and Vagionis and Spence (1994) and Vagionis and Sfakianakis (1997) for Greece. At the same time productivity concerns are being raised more frequently in mainstream geographical thinking.
Konstantinos A. Melachroinos, Nigel Spence

13. Prospects for Finnish Regional Development under EMU and Deepening Integration

The objective of the European Economic and Monetary Union (EMU) is to promote growth and stability. An important and increasingly emphasised aspect of the EMU is regional development. The EMU will bring about both economic benefits and potential costs, which are likely to be unevenly distributed between regions. The development of different regions will depend on their ability to respond to changes and adjust to the new environment.
Marko Ovaskainen

Community Enlargement Towards Central and Eastern Europe: Problems and Prospects


14. The Problem of Transition and Reintegration of East and Central Europe: Conceptual Remarks and Empirical Problems

Regional integration has been an important concept in the process of restructuring in Western Europe since the Second World War, and is undoubtedly also the most important framework in the ongoing process of restructuring and reintegration of the East and Central European nations. The point of departure for the analysis in this chapter is that these old concepts of regional integration can provide useful guidelines for this policy, although the nature of the problem is significantly different.
Andreas P. Cornett

15. The Central and Eastern European Union Enlargement and the EMU: Nominal Convergence and the Optimum Currency Areas Approach

Until recently, one of the main shortcomings of the structure of the EU was the existence of a frontier between Eastern and Western Europe. However, in the period 1994–1996 ten Central and East European Countries (CEECs) applied for EU membership, signing European association agreements as a first step in the integration process. The outcome was the European Commission’s decision in 1997 to begin negotiations in order to expand the EU to the east. This is the fifth EU enlargement, but it introduces new issues regarding economic integration and nominal convergence. The strategy adopted in the Amsterdam Treaty (1996) and Luxembourg EU Council (December 1997) was to consider the CEEC-10 as potential candidates, but to begin a gradual integration process to determine the feasibility of full membership. Initially, five countries were selected, mainly on the basis of their relatively favourable economic situation: the Czech Republic, Hungary, Poland, Slovenia and Estonia.
Joan Costa Font, Joan Batalla Bejerano

16. The Dutch Golden Age and the Rise of Capitalism in Central and Eastern Europe: A Neo-Institutional Comparative Analysis

The socialists’ deliberate organisation of society inspired Barone to formulate principles for solving the allocation problem in a ‘collectivist régime’ and to elaborate the Walrasian and Paretian mathematical approach in order “to determine in what manner the Ministry concerned with production ought to direct it” (Barone 1935, pp. 245–246). It was held that the planning authority should be concerned with the attainment of marginal substitution and transformation rates, with endowments, technologies, and the preferences being given. Hence, the economic problem was perceived as a purely technical one, independent of the political order of society.
Piet de Vries, Raymond J. G. M. Florax

17. Economic Impact of the EU Enlargement on Austrian Regions

In June 1993, the European Council of Copenhagen held out the prospect of membership of the European Union to the associated Central and Eastern European countries (CEECs), once they were in a position to fulfil the obligations attendant to membership and meet the requisite economic and political conditions. Subsequently, the EU Commission prepared comprehensive statements (avis) on the applications filed by ten associated countries in all. These statements provided the basis for the Council’s decision to enter into negotiations, starting in March 1998, with an initial, limited group of applicants (Estonia, Poland, Slovenia, the Czech Republic and Hungary).
Peter Mayerhofer, Gerhard R. M. Palme


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