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Economic integration in Europe has become a multi-speed process. One of the most interesting questions is whether the existence of different speeds of integration can have an impact on the long-term characteristics of this integration. In discussion paper No 1292, Research Affiliates Philippe Martin and Gianmarco Ottaviano look at this question from the point of view of location of economic activities. Their objective is to use the tools of the `new geography' to describe the possible impact of a multi-speed approach to integration on the location choice of industries and therefore on the long-term geography of economic activities in Europe. They present a model where two countries integrate their economies and leave a third temporarily outside because of its lower income. Then, they analyse the effect of different integration sequences on industrial location and convergence during the transition period and in the long term, with and without agglomeration economies. Without agglomeration economies, income differentials at the time of integration are the main determinant of industry location. A long transition period may then be called for to avert concentration in the core countries. On the contrary, with migration the temporary exclusion of the poor country may trigger agglomeration in the rich integrated core. If policy-makers do not believe that migration of human capital and more generally agglomeration economies can set in, a multi-speed approach to integration makes sense because income differentials between countries are the main determinant of industry location. If we think of agglomeration as a long-term phenomenon, the model then suggests some theoretical ground for the common sense view, according to which the transition period before integration of the periphery countries should not be too short, but should not be too long either.
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