Hostname: page-component-76fb5796d-5g6vh Total loading time: 0 Render date: 2024-04-28T15:24:05.470Z Has data issue: false hasContentIssue false
  • English
  • Français

EMU, Investment and Growth: Some Unresolved Issues

Published online by Cambridge University Press:  26 March 2020

Nigel Pain
Nigel Pain*
Affiliation:
National Institute of Economic and Social Research
*
e-mail: n.pain@niesr.ac.uk
Get access Rights & Permissions [Opens in a new window]

Abstract

At the heart of the evaluation of the economic costs and benefits of adopting the euro lies the question of whether living standards would be higher outside or inside the Euro Area. It is well established that there is a strong positive relationship between openness to international trade and investment and the performance of the UK economy. European integration is continuing to help raise the openness of the UK economy, as well as stimulating product market competition and making the UK a more attractive location for mobile investments. This provides an additional channel through which potential output in the UK is linked to the degree of integration with the rest of Europe. Adopting a common currency may bring modest further gains to productivity and living standards by stimulating trade as well as competition. Reducing exchange rate volatility may also raise the level of fixed capital investment in the UK, although the direct evidence for this is limited, and stimulate inward investment from outside Europe, but could reduce the level of foreign direct investment between the UK and the Euro Area. However it is far from clear how big the net benefits might be or how soon they might start to appear. If the UK were to enter monetary union at a significantly overvalued real exchange rate the gains might never materialise at all and there could easily be significant net losses.

Type
Articles
Information
National Institute Economic Review , Volume 180 , April 2002 , pp. 96 - 108
Copyright
Copyright © 2002 National Institute of Economic and Social Research

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

∗

I would like to thank Ray Barrell, Martin Weale and participants in presentations given at Bloomberg, Cazenove and Co, the Statistical and Social Inquiry Society of Ireland symposium on Economic Growth in Ireland and the CEPII/NIESR conference on British Business and the Euro for helpful comments and suggestions. I am also grateful to the ESRC for providing financial support.

References

Abel, A.B. and Eberly, J.C. (1999), ‘The effects of irreversibility and uncertainty on capital accumulation’, Journal of Monetary Economics, 44, pp. 339–377.CrossRefGoogle Scholar
Aghion, P. and Howitt, P. (1998), Endogenous Growth Theory, MIT Press, Massachusetts.Google Scholar
Aizenman, J. (1992), ‘Exchange rate flexibility, volatility and patterns of domestic and foreign direct investment’, IMF Staff Papers, 39, pp. 890–922.CrossRefGoogle Scholar
Aizenman, J. and Marion, N. (2001), ‘The merits of horizontal versus vertical FDI in the presence of uncertainty’, NBER Working Paper No. 8631.Google Scholar
Allen, C., Gasiorek, M. and Smith, A. (1998), ‘The competition effects of the Single Market in Europe’, Economic Policy, 27, pp. 441–486.Google Scholar
Anderton, R. and Skudelny, F. (2001), ‘Exchange rate volatility and Euro Area imports’, European Central Bank Working Paper No. 64.Google Scholar
Arrowsmith, J., Barrell, R., Pain, N., Young, G. and Wlodek, K. (1997), Capital Market Liberalisation In Europe, London, Kogan Page.Google Scholar
Ashworth, P., Hubert, F., Pain, N. and Riley, R. (2001), ‘UK fixed capital formation: determinants and constraints’, report prepared for Department of Trade and Industry and CBI/TUC Working Group on Investment.Google Scholar
Barrell, R. and Pain, N. (1997), ‘Foreign direct investment, technological change, and economic growth within Europe’, Economic Journal, 107, pp. 1770–1776.CrossRefGoogle Scholar
Barrell, R. and Pain, N. (1998), ‘Real exchange rates, agglomerations and irreversibilities: macroeconomic policy and FDI in EMU’, Oxford Review of Economic Policy, 14/3, pp. 152–167.CrossRefGoogle Scholar
Barrell, R. and Pain, N. (1999a), ‘Trade restraints and Japanese direct investment flows’, European Economic Review, 43, pp. 29–45.CrossRefGoogle Scholar
Barrell, R. and Pain, N. (1999b), ‘Domestic institutions, agglomerations and foreign direct investment in Europe’, European Economic Review, 43, pp. 925–934.CrossRefGoogle Scholar
Becker, B. and Pain, N. (2002), ‘What determines industrial R&D expenditure in the UK?’, NIESR mimeo.Google Scholar
Bénassy-Quéré, A., Fontagné, L. and Lahrèche-Révil, A. (2001), ‘Exchange rate strategies in the competition for attracting foreign direct investment’, Journal of the Japanese and International Economies, 15, pp. 178–198.CrossRefGoogle Scholar
Ben-David, D. (1993), ‘Equalizing exchange: trade liberalisation and income convergence’, Quarterly Journal of Economics, 108, pp. 653–679.CrossRefGoogle Scholar
Ben-David, D. (1996), ‘Trade and convergence among countries’, Journal of International Economics, 40, pp. 279–298.CrossRefGoogle Scholar
Ben-David, D., Nordström, H. and Winters, L.A. (2000), Trade, Income Disparity and Poverty, World Trade Organisation Special Studies No.5.Google Scholar
Bernard, A.B. and Jensen, J.B. (1999), ‘Exceptional exporter performance: cause, effect or both?’, Journal of International Economics, 47, pp. 1–25.CrossRefGoogle Scholar
Blair, A.R. (1987), ‘The relative distribution of United States direct investment: the UK/EEC experience’, European Economic Review, 31, pp. 1137–1144.CrossRefGoogle Scholar
Campa, J.M. (1993), ‘Entry by foreign firms in the United States under exchange rate uncertainty’, Review of Economics and Statistics, 75, pp. 614–622.CrossRefGoogle Scholar
Campa, J.M. and Goldberg, L.S. (1999), ‘Investment, pass-through and exchange rates: a cross-country comparison’, International Economic Review, 40, pp. 287–314.CrossRefGoogle Scholar
Carruth, A., Dickerson, A. and Henley, A. (2000), ‘What do we know about investment under uncertainty?’, Journal of Economic Surveys, 14, pp. 119–153.CrossRefGoogle Scholar
Coe, D. and Moghadam, R. (1993), ‘Capital and trade as engines of growth in France’, IMF Staff Papers, 40, pp. 542–566.CrossRefGoogle Scholar
Darby, J., Hughes-Hallet, A., Ireland, J. and Piscitelli, L. (1999) ‘The impact of exchange rate uncertainty on the level of investment’, Economic Journal, 109, C55–C67.CrossRefGoogle Scholar
De Ménil, G. (1999), ‘Real capital market integration’, Economic Policy, 28, pp. 165–201.Google Scholar
Dixit, A.K. and Pindyck, R.S. (1994), Investment Under Uncertainty, Princeton University Press.CrossRefGoogle Scholar
Dunning, J.H. (1997), ‘The European Internal Market Programme and inbound foreign direct investment’, Journal of Common Market Studies, 35, pp. 1–30 and 189–224.CrossRefGoogle Scholar
Epstein, L.G. and Miao, J. (2002), ‘A two-person dynamic equilbrium under ambiguity’, Journal of Economic Dynamics and Control, forthcoming; also available at: http://www.econ.rochester.edu/Faculty/Epstein/two15.pdfGoogle Scholar
Frankel, J. and Rose, A. (2002), ‘An estimate of the effect of common currencies on trade and income’, Quarterly Journal of Economics forthcoming (revised version of CEPR Discussion Paper No. 2631).CrossRefGoogle Scholar
Fujita, M., Krugman, P. and Venables, A.J. (1999), The Spatial Economy: Cities, Regions and International Trade, Cambridge MA., SAGE Publications,CrossRefGoogle Scholar
Girma, S., Greenaway, D. and Wakelin, K. (2001), ‘Who benefits from foreign direct investment in the UK?’, Scottish Journal of Political Economy, 48, pp. 119–133.CrossRefGoogle Scholar
Glick, R. and Rose, A. (2002), ‘Does a currency union affect trade? The time series evidence’, European Economic Review, forthcoming (revised version of NBER Working Paper No. 8395).CrossRefGoogle Scholar
Goldberg, L. and Kolstad, C. (1995), ‘Foreign direct investment, exchange rate variability and demand uncertainty’, International Economic Review, 36, pp. 855–873.CrossRefGoogle Scholar
Griffith, R. (2001), ‘Product market competition, efficiency and agency costs: an empirical analysis’, Institute for Fiscal Studies Working Paper WP01/12.CrossRefGoogle Scholar
Grossman, G.M. and Helpman, E. (1991), Innovation and Growth in the Global Economy, Cambridge MA., SAGE Publications.Google Scholar
HM Treasury (1997), UK Membership of the Single Currency: An Assessment of the Five Economic Tests, London, HMSO.Google Scholar
Hoeller, P., Girouard, N. and Colecchia, A. (1998), ‘The European Union's trade policies and their economic effects’, OECD Economics Department Working Paper No.194.Google Scholar
Hubert, F. and Pain, N. (2001), ‘Inward investment and technical progress in the United Kingdom manufacturing sector’, Scottish Journal of Political Economy, 48, pp. 134–147.CrossRefGoogle Scholar
Krugman, P. (1991), Geography And Trade, Cambridge MA., SAGE Publications.Google Scholar
McCallum, J. (1995), ‘National borders matter: Canada-U.S. regional trade patterns’, American Economic Review, 85, pp. 615–623.Google Scholar
Midelfart-Knarvik, K., Overman, H., Redding, S. and Venables, A. (2000), ‘The location of European industry’, European Commission Economic Paper No. 142.Google Scholar
Nitsch, V. (2000), ‘National borders and international trade: evidence from the European Union’, Canadian Journal of Economics, 33, pp. 1091–1105.CrossRefGoogle Scholar
Nucci, F. and Pozzolo, A.F. (2001), ‘Investment and the exchange rate: an analysis with firm level panel data’, European Economic Review, 45, pp. 259–283.CrossRefGoogle Scholar
Oulton, N. (2000), ‘Why do foreign-owned firms in the UK have higher labour productivity?’, in Pain (2000).CrossRefGoogle Scholar
Pain, N. (1997), ‘Continental drift: European integration and the location of UK foreign direct investment’, The Manchester School Supplement, LXV, pp. 94–117.CrossRefGoogle Scholar
Pain, N. (2000) (Ed.), Inward Investment, Technological Change And Growth: The Impact of Multinational Corporations on the UK Economy, Basingstoke, Palgrave Press.Google Scholar
Pain, N. and Hubert, F. (2000), ‘Inward investment and technical progress in the United Kingdom’, in Pain (2000).CrossRefGoogle Scholar
Pain, N. and Hubert, F. (2002), ‘Fiscal incentives, European integration and the location of foreign direct investment’, The Manchester School, forthcoming.CrossRefGoogle Scholar
Pakko, M. and Wall, H. (2001), ‘Reconsidering the trade-creating effects of a currency union’, Federal Reserve Bank of St. Louis Review, 83, 5, pp. 37–46.Google Scholar
Persson, T. (2001), ‘Currency unions and trade: how large is the treatment effect?’, Economic Policy, 33, pp. 435–448.Google Scholar
Proudman, J. and Redding, S. (Eds) (1998), Openness and Growth, London, Bank of England.Google Scholar
Rodríguez, F. and Rodrik, D. (2000), ‘Trade policy and economic growth: a skeptic's guide to the cross-national evidence’, NBER Macroeconomics Annual.CrossRefGoogle Scholar
Rose, A. (2000), ‘One money, one market: the effect of common currencies on trade’, Economic Policy, 30, pp. 9–45.Google Scholar
Rose, A. (2001), ‘Currency unions and trade: the effect is large’, Economic Policy, 33, pp. 449–459.CrossRefGoogle Scholar
Thom, R. and Walsh, B. (2002), ‘The effect of a currency union on trade: lessons from the Irish experience’, European Economic Review (forthcoming).CrossRefGoogle Scholar
UNCTAD (2001), World Investment Report 2001: Promoting Linkages, Geneva, United Nations.Google Scholar