Financial integration and growth - Is emerging Europe different? Christian Friedrich, Isabel Schnabel and Jeromin Zettelmeyer Summary Using industry-level data, this paper shows that the European transition region benefited much more strongly from financial integration in terms of economic growth than other developing countries in the years preceding the current crisis. We analyse several factors that may explain this finding: financial development, institutional quality, trade integration, political integration, and financial integration itself. The explanation that stands out is political integration. Within the group of transition countries, the effect of financial integration is strongest for countries that are politically closest to the European Union. This suggests that political and financial integration are complementary and that political integration can considerably increase the benefits of financial integration. Keywords: Financial integration; political integration; economic growth; multinational banking; European transition economies. JEL Classification: F32, F36, O16, G21. Contact details: Jeromin Zettelmeyer, One Exchange Square, London EC2A 2JN, United Kingdom. Phone: +44-207-338 6178; Fax: +44-207-338 6178; email:
[email protected]. Christian Friedrich is a PhD candidate at the Graduate Institute for International and Development Studies, Geneva; Isabel Schnabel is a Professor of Economics at the Johannes Gutenberg University, Mainz; Jeromin Zettelmeyer is Deputy Chief Economist of the European Bank for Reconstruction and Development. We thank Erik Berglof,¨ Nauro Campos, Ralph de Haas, Stephanie Hofmann, Ayhan Kose, Cedric´ Tille, and participants of the ECB-JIE Conference on “What Future for Financial Globalisation?” for valuable comments and suggestions. We also benefited from comments by seminar participants at the European Bank for Reconstruction and Development, the Universities of Bayreuth, Mainz, Osnabruck,¨ Tubingen,¨ and the Graduate Institute Geneva.