What's so Special About Specialisation in the Euro Area?

58 Pages Posted: 8 Feb 2016

See all articles by Francesco Paolo Mongelli

Francesco Paolo Mongelli

European Central Bank (ECB); Goethe University Frankfurt

Elisa Reinhold

European Central Bank (ECB)

Georgios Papadopoulos

Central Bank of Slovenia

Date Written: February 8, 2016

Abstract

Euro area countries exhibited modest convergence prior to the financial crisis and diverged thereafter. Such divergence has been examined from many angles, and various narratives of the crisis have developed. Surprisingly, the gradual transformation of the economic structures of euro area countries over the last 15-20 years has, however, received less attention. This paper brings together several strands of evidence - both macro and micro - on such economic transformation. It makes three contributions. First, profound changes are found in the allocation of countries’ resources across sectors as had been predicted prior to the launch of the euro. In some cases, transformation precedes the launch of the euro, such as the industrial sector, and might reflect different comparative advantages. Such specialisation is not problematic, and is generally accompanied by diverse risk sharing channels. Yet, the second contribution of this paper is to show instead that in some euro area countries productive resources were misallocated to less efficient and lower productivity sectors. In order to distinguish between good and bad specialisation, a firm-based database is examined. The third contribution shows that frictions play an important role in preventing the shift of resources towards more productive firms and thus reduce the potential growth of some countries. This might then explain in part the modest convergence and then divergence of euro area countries.

Keywords: euro area, convergence, specialisation, productivity, risk-sharing

JEL Classification: E01, F45, J21 and O47

Suggested Citation

Mongelli, Francesco Paolo and Reinhold, Elisa and Papadopoulos, Georgios, What's so Special About Specialisation in the Euro Area? (February 8, 2016). ECB Occasional Paper No. 168, Available at SSRN: https://ssrn.com/abstract=2729245

Francesco Paolo Mongelli (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Elisa Reinhold

European Central Bank (ECB) ( email )

Sonnemannstrasse 20
Frankfurt am Main, 60314
Germany

Georgios Papadopoulos

Central Bank of Slovenia ( email )

Slovenska 35
Ljubljana, 1000
Slovenia

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