Benefits of EMU Participation: Estimates Using the Synthetic Control Method

Verstegen, Loes; Groezen, Bas van; Meijdam, A.C.

doi:10.2139/ssrn.3027932

Cited by 7 publications

(12 citation statements)

References 25 publications

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“…It is not a coincidence that the sudden reversal of Italy's economic fortunes occurred after Italy's adoption of the "legal and policy superstructure" imposed by the Maastricht Treaty of 1992, which cleared the road for the establishment of the European Economic and Monetary Union (EMU) in 1999 and the introduction of the single currency in 2002 (Bagnai 2016;Fazi 2018). This is confirmed by a recent econometric counterfactual analysis, which concludes that of all member states (except Greece), Italy benefited the least from joining the EMU in terms of real GDP growth, both during the precrisis years 1997-2007 and the crisis period 2008-2014 (Verstegen, van Groezen, and Meijdam 2017…”

Section: Fall 2019supporting

confidence: 54%

“…7. The impact of EMU membership on growth is estimated by comparing the actual income growth of a member state to a counterfactual, built using the synthetic control method in which an EMU country's growth is matched as closely as is possible to the growth path of a control group of non-EMU countries (Verstegen et al 2017). 8.…”

Section: Italy's Permanent Crisis As the Future Of The Entire Eurozone?mentioning

confidence: 99%

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Lost in Deflation: Why Italy’s Woes Are a Warning to the Whole Eurozone

Storm

2019

International Journal of Political Economy

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Using macroeconomic data for 1960-2018, this article analyzes the origins of the crisis of the "post-Maastricht Treaty order of Italian capitalism." After 1992, Italy did more than most other Eurozone members to satisfy EMU conditions in terms of self-imposed fiscal consolidation, structural reform, and real wage restraint-and the country was undeniably successful in bringing down inflation, moderating wages, running primary fiscal surpluses, reducing unemployment, and raising the profit share. But its adherence to the EMU rulebook asphyxiated Italy's domestic demand and exports-and resulted not just in economic stagnation and a generalized productivity slowdown but in relative and absolute decline in many major dimensions of economic activity. Italy's chronic shortage of demand has clear sources: (1) perpetual fiscal austerity; (2) permanent real wage restraint; and (3) a lack of technological competitiveness, which in combination with an overvalued euro weakens the ability of Italian firms to maintain their global market shares in the face of increasing competition of low-wage countries. These three causes lower capacity utilization; reduce firm profitability; and hurt investment, innovation, and diversification. The EMU rulebook thus locks the Italian economy into economic decline and impoverishment. The analysis points to the need to end austerity and devise public investment and industrial policies to improve Italy's "technological competitiveness" and stop the structural divergence between the Italian economy and that of France/Germany. The issue is not just to revive demand in the short run (which is easy) but to create a self-reinforcing process of investment-led and innovationdriven process of long-run growth (which is difficult).

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Section: Fall 2019supporting

confidence: 54%

Section: Italy's Permanent Crisis As the Future Of The Entire Eurozone?mentioning

confidence: 99%

Lost in Deflation: Why Italy’s Woes Are a Warning to the Whole Eurozone

Storm

2019

International Journal of Political Economy

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“…In particular, this paper closely relates to the recent literature about the Euro adoption using the synthetic control approach (Fernández and Garcia-Perea (2015), Verstegen et al (2017), and Gasparotti and Kullas (2019) among others). We build directly on the work of Puzzello and Gomis-Porqueras (2018) by extending their analysis from six to twelve member states which joined the Euro until 2007.…”

Section: Introductionmentioning

confidence: 66%

“…Secondly, since the counterfactual weights are constructed according to the pre-intervention characteristics, we have to assure that there are no (external) differentiated shocks during the study period in the donor pool countries (Abadie (2019)). To account for this issue, contrarily to Fernández and Garcia-Perea (2015) and Verstegen et al (2017), we only consider observations until 2007. From 2008 onward, the Great Recession affected countries in very different ways and arguably provoked structural changes in the affected economies.…”

Section: Methodsmentioning

confidence: 99%

Adopting the Euro: A Synthetic Control Approach

Gabriel

Pessoa

2020

SSRN Journal

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We investigate whether joining the European Monetary Union and losing the ability to set monetary policy affected the economic growth of 12 Eurozone countries. We use the synthetic control approach to create a counterfactual scenario for how each Eurozone country would have evolved without adopting the Euro. We let this matching algorithm determine which combination of other developed economies best resembles the pre-Euro path of twelve Eurozone economies. Our estimates suggest that there were some mild losers (France, Germany, Italy, and Portugal) and a clear winner (Ireland). Nevertheless, a GDP decomposition analysis suggests that the drivers of the economic gains and losses are heterogeneous.

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“…More recently, several empirical studies by Fernandez & Garcia Perea (2015), Verstegen et al (2017), Lin & Chen (2017), Gomis-Porqueras & Puzzello (2018) and Gabriel & Pessoa (2020) have attempted to provide such an ex-post benchmark by applying the synthetic control method (SCM) by Abadie & Gardeazabal (2003) and Abadie et al (2010Abadie et al ( , 2015 (AGDH hereinafter). However, the evidence by applying this method is not overly consistent, leading to the conclusion that the method is not too robust to different settings of the adjustment screws such as changes in the donor pool, selection of covariates and the use of pre-intervention outcomes as separate predictors.…”

Section: Introductionmentioning

confidence: 99%

Structural time series models and synthetic controls—assessing the impact of the euro adoption

Dreuw

2022

Empir Econ

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So far, empirical research on an ex-post benchmark of the euro adoption has relied on the synthetic control method by Abadie & Gardeazabal (Am Econ Rev 93:112-132, 2003) and Abadie et al. (J Am Stat Assoc 105:493-505, 2010, Am J Polit Sci, 59:495-510, 2015). However, the evidence obtained with this method is not overly consistent, leading to the conclusion that the method is not too robust to different settings of the adjustment screws. Using a new method developed by Harvey & Thiele (J Appl Econ 36:71–85, 2021) based on structural time series models, I find that France and Italy are clear losers from the euro while there are no real winners until 2019. Spain, Netherlands, Greece gain in the period before the financial crisis, but afterwards they lose. In fact, only the German economy is robust to the two crises but it loses until 2008. Relating the theories of optimum currency areas to the estimated gaps of the euro adopters from their synthetic controls, I find that openness, real convergence, and net migration are the main drivers of gains from a euro adoption, while the main drivers of losses are low levels of competitiveness, fiscal instability and labour market rigidity. Examining the crisis channels of the financial and euro crisis shows that fiscal instability, labour market rigidity and also business cycle synchronization cause large losses during the crises. Net migration helps to dampen these shocks. While openness is beneficial during the pre-crises period, it cannot help dampen the shock of the crises.

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Benefits of EMU Participation: Estimates Using the Synthetic Control Method

Cited by 7 publications

References 25 publications

Lost in Deflation: Why Italy’s Woes Are a Warning to the Whole Eurozone

Lost in Deflation: Why Italy’s Woes Are a Warning to the Whole Eurozone

Adopting the Euro: A Synthetic Control Approach

Structural time series models and synthetic controls—assessing the impact of the euro adoption

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