European Integration, Regional Specialization, and Asymmetric Shocks

Krugman (1991) speculated that dismantling the remaining barriers to trade within the European Union would lead to increased spatial concentration of production and greater dissimilarity of production profiles between member countries. More startlingly, such specialization might endanger the monetary union by exposing regions and countries to geographically concentrated downturns and asymmetric shocks. We test Europe’s resilience to asymmetric shocks with large panel data at the year, industry (NACE), and region (NUTS 2) level between 2003 and 2011. In contrast to the hypothesis, empirical estimates demonstrate that during a financial collapse, specialized regions outperform their more diversified counterparts. We conclude that integration increases Europe’s capacity for resilience in times of severe economic distress. This result is robust to a suite of multi-level specifications.