Foreign direct investment and the euro: the first five years

Abstract

This paper assesses the main influences on foreign direct investment (FDI) flows between the major economies in the first five years of economic and monetary union (EMU). Using previously unpublished data specially provided by Eurostat, it concludes that the huge wave of FDI that reached the Eurozone after EMU was largely a manifestation of the end-of-century takeover boom, a global phenomenon of which the euro was only a subsidiary cause. But much of the boom in euro economies' FDI disappears if flows to and from the Belgium-Luxembourg Economic Union (BLEU) (dominated by transhipment via Luxembourg) are removed. On that basis, intra-zone FDI turns out to have been weak after EMU, both in relation to previous trends and as a share of major economies' global FDI flows. However, the euro appears to have given a modest stimulus to inflows from other major investing economies, while the UK share of the latters' outflows has fallen moderately in the post-EMU period. The policy implications are discussed.