Enduring the great recession: Economic integration in the European Union

Scholars have long feared that regional economic specialization, fostered by freer trade, would make the European Union vulnerable to economic downturn. The most acute concerns have been over the adoption of the common currency: by adopting the euro, countries renounce their ability to meet an asymmetric shock with independent revaluations of their currencies. We systematically test the prediction that regional specialization increases vulnerability to economic downturn using a novel dataset that covers all of the EU’s subnational regions and major sectors of the economy between 2000 and 2013. We find that, contrary to conventional wisdom, the most specialized regions actually fared better during the 2008-09 global financial crisis. Specialized regions performed worse only in states that remained outside the Eurozone. The heightened vulnerability of non-Eurozone states cannot be attributed to fiscal or social policy failures. Rather, our results suggest the common currency may have helped Eurozone members share risk. This bodes well for the resiliency of the EU, even as it navigates another economic downturn from the asymmetric impact of the novel coronavirus.