Deeper, Wider and More Competitive? Monetary Integration, Eastern Enlargement and Competitiveness in the European Union

36 Pages Posted: 4 Jan 2008

See all articles by Gianmarco I.P. Ottaviano

Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation

Daria Taglioni

World Bank, Development Economics

Filippo di Mauro

European Central Bank (ECB)

Date Written: December 2007

Abstract

What determines a country's ability to compete in international markets? What fosters the global competitiveness of its firms? And in the European context, have key elements of the EU strategy such as EMU and enlargement helped or hindered domestic firms' competitiveness in local and global markets? We address these questions by calibrating and simulating a conceptual framework that, based on Melitz and Ottaviano (2005), predicts that tougher and more transparent international competition drives less productive firms out the market, thereby increasing average productivity as well as reducing average prices and mark-ups. The model also predicts a parallel reduction of price dispersion within sectors. Our conceptual framework allows us to disentangle the effects of technology and freeness of entry from those of accessibility (i.e. the ease for local firms to reach local and foreign consumers). On the one hand, by controlling for the impact of trade frictions, we are able to construct an index of 'revealed competitiveness', which would drive the relative performance of countries in an ideal world in which all faced the same barriers to international transactions. On the other hand, by focusing on the role of accessibility while keeping 'revealed competitiveness' as given, we are able to evaluate the impacts of EMU and enlargement on the competitiveness of European firms. We find that EMU positively affects the competitiveness of firms located in participating economies. Enlargement has, instead, two contrasting effects. It improves the accessibility of EU members but it also increases substantially the relative importance of unproductive competitors from Eastern Europe.

Keywords: European integration, gains from trade, competitiveness, firm-level data, total factor productivity

JEL Classification: F12, R13

Suggested Citation

Ottaviano, Gianmarco I.P. and Taglioni, Daria and di Mauro, Filippo, Deeper, Wider and More Competitive? Monetary Integration, Eastern Enlargement and Competitiveness in the European Union (December 2007). ECB Working Paper No. 847, Available at SSRN: https://ssrn.com/abstract=1068864

Gianmarco I.P. Ottaviano (Contact Author)

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation ( email )

Via Gobbi 5
Milan, 20136
Italy

Daria Taglioni

World Bank, Development Economics ( email )

Washington, DC 20433
United States

Filippo Di Mauro

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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