Assessing European Economic Integration with the Heckscher-Ohlin Model, a comparison between Germany and Greece

Abstract

This thesis attempts to explain the effects of the European economic integration on two member countries, namely Greece and Germany. Based on their differences in relative factor endowments, the bilateral trade pattern, the industrial structure and the product prices are analyzed in a neo classical Heckscher-Ohlin framework. The process of continuous economic integration puts pressure on the member countries for industrial restructuring in order for efficiency gains to be realized. Hence, the industrial structure of Greece, Germany and other EU member countries is also examined and reveals that member nations bear differences in their endowments and have also increased their specialization level in industries that have a comparative advantage over their EU counterparts. Trade profiles verify the bilateral trade pattern predicted by the Heckscher-Ohlin although the existence of intra-industry trade requires the adoption of New Trade Theory terminology. Therefore, certain facts about the EU reality are confronted with the assumptions of the model in order to evaluate the degree of its applicability. This is especially relevant for future deeper and wider economic integration with forthcoming waves of enlargement and the implementation of the EU Services Directive.