Sectoral specialisation in the EU a macroeconomic perspective

Notes : The signs in parentheses indicate the predicted direction of the effect of economic integration on sectoral specialisation depending on
the underlying mechanism.

Note that the graph does not describe single-sided causal links, as trade and financial integration are themselves affected by specialisation and
are thus endogenous variables.

1 THE RELEVANCE

OF SECTORAL

SPECIALISATION

FOR

MONETARY POLICY

In addition, the theory of New Economic
Geography⁷ highlights the existence of certain
external effects or “economies of
agglomeration” such as a pool of specialised
suppliers, knowledge spillovers and specialised
labour markets. These factors may lead to a
concentration of industrial activity in certain
countries or regions (“cumulative causation”).
However, the spatial concentration of
production implies specialisation in a particular
sector or industry only if agglomeration forces
are induced by spillovers that affect firms
within the same industry rather than firms
belonging to different industries; in the latter
case, diverse industrial activities are pooled in
certain regions (“cluster theory”).
Nevertheless, the predictions for the
distribution of activity arising from economic
geography theory are ambiguous because
agglomeration also creates congestion costs,
thus offsetting the positive agglomeration
effects.

Economic integration may diminish the
importance of transport costs, reduce barriers to
labour mobility and more generally lower
transaction costs, which increases the
likelihood of agglomeration dynamics. In this
respect EMU constitutes an additional factor
affecting productive structures, fostering intra-
industry trade and thus reducing relative
specialisation between countries beyond the
supply-side effects that may be expected from
reduced exchange rate volatility.⁸ On the other
hand, financial integration can also foster
sectoral specialisation by facilitating risk-
sharing among countries; this then allows them
to fully exploit their comparative advantages
through trade and specialisation.⁹ Empirical
studies, however, do not point to any major
improvement of risk sharing for the euro area,¹⁰

7 P. Krugman (1991), “Increasing returns and economic
geography”, Journal of Political Economy; M. Fujita, P.
Krugman, A. J. Venables (1999) - “The spatial economy. Cities,
regions and international trade”, MIT Press, Cambridge, MA.

8 J. Frankel and A. Rose (1998), “The Endogeneity of the Optimum
Currency Area”, Economic Journal, 108/449, pp. 1009-1025.

9 S. Kalemi-Ozcan, B. E. Sorensen and O. Yosha (2003), “Risk
Sharing and Industrial Specialization: Regional and
International Evidence”, American Economic Review, no 93/3,
pp. 903-918.

10 G. Moser, W. Pointner and J. Scharler (2003), “International
Risk Sharing in Europe: Has Anything Changed?”, OeNB
Working Paper.

ECB

Occasional Paper No. 19
July 2004

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