disinvestment that has taken place over the recent years, and especially so in the peripheral
economies. Unless it is quickly reversed, disinvestment not only hinders long-term growth but
also undermines the prospects of a gradual reduction of unemployment and risks further
imbalances in, and threats to, the monetary union. Combining a neoclassical Diamond model
with labour market imperfections, the paper shows that unemployment is a function of capital
investment under either CES or Cobb-Douglas production functions. A cross-section estimate
for the euro area economies confirms the theoretical findings.
Keywords: euro area, investment, unemployment, capital-labour..