Investigations into the macroeconomic interdependence of Western Europe: Is there evidence for two-tier Europe?

In this paper we investigate whether the degree of interdependence of some macroeconomic variables (real output, government expenditures, private consumption, trade flows, inflation rate, and money supply) supports the division of western European countries into two different blocks. We divide western European countries into core and periphery according to their geographical location in order to avoid the problem of characterizing the countries so that the results fit into preconceived ideas. Then we check the robustness of this division by a variety of econometric techniques, namely a structural vector autoregressive model, principal component analysis, and tests for common trends and common cycles among these variables. The results are not decisive, however there is some support for the core-periphery distinction.