Capital and trade flows in Europe and the impact of enlargement

Abstract

The Eastern enlargement of the European Union (EU) is likely to give a further boost to trade and capital flows, yet empirical evidence on its possible effects is scarce. This paper uses four different datasets to estimate the determinants of international asset holdings and trade flows. We find in most regressions that EU membership has a significant effect. Based on additional forecasts of the expected flows to 10 transition economies, we conclude that for the EU candidates actual levels are still far below expected values in most cases. Consequently, we anticipate raising capital and trade flows with the approach of EU accession, in particular for the seven EU candidates besides the Czech Republic, Hungary, and Poland.