The Impact of Euro on Emu Trade: The (Early) Effect is Not so Large
30 Pages Posted: 12 Feb 2003
Date Written: December 2002
We investigate the impact of the euro adoption on commercial transactions of EMU countries. We refer to the abundant gravity-model literature about the effect of Currency Unions on trade originated by Rose (2000). We adapt this kind of modelling to the specific case of the European Monetary Union drawing from former literature some guidelines summed up as follows: distinction of "pure" common currency from exchange rate volatility effect; selection of sample countries strictly focused on EMU economies; consideration of time as well as space dimension; inclusion of other political factors promoting integration. We add to these provisions the observation that the panel estimation of the gravity equation must be dynamic, because EMU is a young phenomenon; short run effects, like trade persistence, can hence play a crucial role.
Our main finding is that the euro adoption has had a positive but not exorbitant impact on bilateral trade of European countries (the estimated percentage increase ranges between 2.6 and 6.3%), much lower than that derivable from Rose's estimates referred to a larger and heterogeneous set of countries (providing a trade increase following the adoption of a common currency by as much as 200%). Our results refer to short-run impacts; long-run effects could be stronger (but, in our opinion, not by the order of a double or a trebling effect indicated in the existing literature on currency unions), particularly if the structural change implied by the new currency regime (a fraction of foreign trade is potentially equivalent to domestic trade) becomes completely interiorised in the perception and the behaviour of Euroland citizens.
Keywords: Bilateral, Economic Integration, Dynamic Panel data
JEL Classification: F4, F15, C230
Suggested Citation: Suggested Citation