European Monetary Integration and Transatlantic Investment: Assessing US Outward FDI to the EU

Abstract This paper examines how increased monetary integration in Europe, through fixed exchange rates or a single currency, affects US outward Foreign Direct Investment (US OFDI). We analyze 56 host countries from 1985 to 2019, focusing on the European Union (EU) and specific EU country groupings. Using dummy variables, we distinguish real and monetary effects and key stages of European monetary integration. A benchmark gravity model, estimated with two Poisson Pseudo-Maximum Likelihood (PPML) estimators, shows that both horizontal FDI (firms replicating production to serve local markets) and vertical FDI (fragmenting production to exploit cost differences) drive US OFDI. EU membership alone significantly attracts US investment, highlighting the Single Market’s role in a range between 119% and 138%. Furthermore, the exchange rate stability implicit in the Exchange Rate Mechanism (ERM) and the euro also produced an additional positive impact on US FDI of 53% and 32%, respectively, though with substantial disparities between core and peripheral countries. These findings remain robust across various specifications and estimators.