Integrating the Neighbors: A Dynamic Panel Analysis of the EU-ENP Countries’ Trade Relations

Abstract

The paper investigates the impact of trade relations among the European Union (EU) 7 and the European Neighborhood Policy countries, the ENPCs, on the economic performance of the latter. The analysis uses panel data for 14 ENPCs over the period 2000–2011 and recently developed panel cointegration techniques. The results of the analysis indicate that the effects of trade integration with the EU on ENPCs growth performance may depend on the development gap between trade partners. Deeper trade integration with the higher-income EU countries is found to have a negative impact on the growth performance of the ENPCs. In contrast, deeper trade integration with the middle- and lower-income EU countries is found to have a positive growth impact. The findings of the paper highlight the limits of integration among unequal partners, but also the need for a geographically more balanced pattern of trade relations that will improve growth prospects in the external and internal EU periphery.