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The Economic Potential of a Larger Europe

The Economic Potential of a Larger Europe

Edited by Klaus Liebscher, Josef Christl, Peter Mooslechner and Doris Ritzberger-Grünwald

The Economic Potential of a Larger Europe gives insights into past, present and future issues related to the ongoing EU enlargement process. Providing a unique forum for debate and a multiplicity of views and experiences from both high-profile academics and those who engage with enlargement on an implementation level, this book covers a wide range of topics that are key to a successful transition and integration process and thus to the provision of a prosperous growth environment within a larger Europe. Special attention is paid to monetary integration, notably entry into ERM II, on which representatives of the national central banks involved present their views.

Chapter 11: Intra-industry trade between the EU and the acceding countries: the impact of foreign direct investment on trade structures

Jark Fidrmuc and Martin Djablik


Jarko Fidrmuc and Martin Djablik1 1. INTRODUCTION Recent economic developments in the acceding countries reflect the fact that, first, macroeconomic and microeconomic disequilibria were rapidly removed during the initial years of economic reform and that, second, economic developments in the (largely) transformed economies remain more dynamic than those in OECD countries. The stabilization policy proposed in Central and Eastern Europe to reach macroeconomic as well as microeconomic equilibrium necessitated dramatic adjustments in the initial years of economic reform. Following the removal of price controls, high inflation or even hyperinflation was observed, but inflation quickly stabilized at relatively low rates (see Backé et al., 2003). In the more advanced Central and Eastern European countries (CEECs) it took just a few years to remove inefficient production structures and nearly complete privatization (see Djankov and Murrell, 2002). As a result, the CEECs experienced output declines by a significant fraction of GDP and unemployment peaked at internationally high levels (see Svejnar, 2001). Fundamental changes have also been observed in the CEEC’s trade orientation. Based on gravity model predictions, Hamilton and Winters (1992) foresaw a significant growth spurt to the ‘potential level’ of trade between CEECs and the EU. Fidrmuc and Fidrmuc (2003) document that, with the most recent efforts, this adjustment to the equilibrium level has nearly been completed. This chapter compares the patterns of EU trade between 1989 and 2001 with OECD countries (including intra-EU trade) on the one hand and with the acceding countries...

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