Study on the Impact of the Euro on Trade and Foreign Direct Investment

European Economic and Monetary Union Working Paper No. 321

141 Pages Posted: 3 Aug 2008

See all articles by Richard E. Baldwin

Richard E. Baldwin

University of Geneva - Graduate Institute of International Studies (HEI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Virginia Di Nino

Bank of Italy

Lionel Fontagne

University of Paris 1 Panthéon Sorbonne; Paris School of Economics; CEPII

Roberto A. De Santis

European Central Bank (ECB) - Directorate General Economics

Daria Taglioni

World Bank, Development Economics

Date Written: May 2008

Abstract

The introduction of the euro opens the door to a major advance in our understanding of how a common currency affects economic activity ranging from trade and foreign direct investment to wage-setting behaviour and corporate business strategies. Regarding the euro's trade effects we confirm the received wisdom that the euro has promoted trade significantly, with the aggregate impact being in the range of 5% or so. Then, we refine our understanding of exact how the euro was boosting trade by considering two main channels: the relative price channel (the euro boosted trade inside the Eurozone since it lowered the relative price of traded goods coming from the Eurozone), and the newly-trade goods channel (the euro induced firms to export a wider range of their products to the Eurozone) - an hypothesis confirmed by the use of four firm-level data sets. Lastly, using the best available data, theory and econometric techniques, we conclude that both Single Market integration and euro area membership have pro-FDI effects.

Keywords: euro, trade, FDI

JEL Classification: F15, F21

Suggested Citation

Baldwin, Richard E. and Di Nino, Virginia and Fontagne, Lionel and De Santis, Roberto A. and Taglioni, Daria, Study on the Impact of the Euro on Trade and Foreign Direct Investment (May 2008). European Economic and Monetary Union Working Paper No. 321. Available at SSRN: https://ssrn.com/abstract=1163774 or http://dx.doi.org/10.2139/ssrn.1163774

Richard E. Baldwin

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland
+41 22 908 5933 (Phone)
+41 22 733 3049 (Fax)

HOME PAGE: http://www.hei.unige.ch/~baldwin/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Virginia Di Nino

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Lionel Fontagne

University of Paris 1 Panthéon Sorbonne ( email )

Maison des Sciences Economiques
106-112 Bd de l'Hôpital
Paris, 75013
France
+33 1 44 07 89 94 (Phone)
+33 1 53 68 55 01 (Fax)

HOME PAGE: http://lionelfontagne.weebly.com/

Paris School of Economics ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France
+33 1 44 07 89 94 (Phone)

HOME PAGE: http://lionelfontagne.weebly.com/

CEPII ( email )

9 Rue Georges Pitard
Paris, 75015
France
+33 1 53 68 55 06 (Phone)

HOME PAGE: http://lionelfontagne.weebly.com/

Roberto A. De Santis

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Daria Taglioni (Contact Author)

World Bank, Development Economics ( email )

Washington, DC 20433
United States

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