Impact of COVID-19 on real effective exchange rates of EU member countries

Abstract

There is a lack of close historic parallel to the economic impact of COVID-19. The COVID19 shock has led to most economies in the Euro area experiencing exchange rate pressures, enormous job losses and contractions in output. By recognising that a stable currency has the tendency to reverse some of these challenges, this study investigates the impact of the pandemic on the exchange rate of all EU member countries. The main objective is to find the relationship between the government’s lockdown measures measured by the Stringency index and monthly exchange rate per the USD for all EU member countries. Using both a correlation and a Dynamic Ordinary Least Square (DOLS) model, the results show that as lockdown measures intensified, countries in Europe lost their competitiveness in the long-run. In the short-run however, only Cyprus, the Czech Republic and Greece lost their competitiveness as the lockdown measures intensified. The results also confirm the asymmetry of shocks in Europe, further questioning the benefits for countries seeking to adopt the Euro.