Systematic growth asymmetry in the Eurozone? Evidence from a natural experiment

Abstract

The purpose of the study is to determine whether the euro has caused a systematic growth asymmetry within the Eurozone; namely, between Eurozone's core and Eurozone's southern periphery. The overall growth effect of the euro on the entire Eurozone is also evaluated. The model specification is based on the neoclassical growth model extended to include human capital accumulation. The empirical analysis is organized in terms of a natural experiment where several counterfactual control groups are utilized to simulate growth in the absence of the euro. Estimation is based on a balanced panel of annual observations from twenty-one countries for the period from 1980 to 2017. The study finds that the euro has caused a systematic growth asymmetry within the Eurozone. The euro has been a growth stimulant for Eurozone's core but growth inhibitor for Eurozone's southern periphery, thus, yielding a dual speed Eurozone. This result is robust to the choice of counterfactual control group and to the 2008 global financial crisis. The study also finds that remarkable growth performance is possible for European economies outside the EU structure, thus, without the euro.