Why Do Regions Differ in Growth? The Productivity of the Eurozone and Its Contribution to the Added Value of Its European Neighbors

Abstract

Despite the fact that the European integration process has intensified cooperation among European partners, the significant impact on growth represented by the recent lengthy periods of productivity stagnation in European countries still remains unexplained, as are the growing disparities among the more advanced countries of the integrated economy. This paper focuses on long-term economic growth based on productivity and its components, as well as on the effects of integration of EMU and non-EMU member states. The use of spatial econometric models allows us to incorporate the interactions among European countries into growth models. In line with neoclassical growth models, our results contribute to explaining how the growth of a eurozone country is related to the economic growth of its neighbors. Moreover, we confirm the relevance of eurozone countries’ interactions in times of crisis (2009–2018), as European countries generate spatial spillover effects that link their economic cycles. Although capital stock (i.e., investment) has a positive effect on the eurozone’s growth, its slowdown cannot compensate for the effect of declining labor-force participation, which is proven to be a crucial factor for growth. Likewise, immigration flows affect economic growth, but this differs according to the workers’ level of education.