Life on the outside: economic conditions and prospects outside euroland

Abstract

The European economic and monetary union (EMU) is now over 4 years old. In this paper we assess whether monetary union has begun to have significant economic effects by comparing countries in EMU with the EU countries outside. We focus principally on trade creation between EMU member countries, using a methodology that controls for the fact that the decision to join the monetary union was not random but was more likely to be taken by countries whose prospects of trading with other EMU members were already high. We find that the trade effects of monetary union are significant. We estimate that had the UK been inside EMU the sum of its imports and exports could have been substantially greater. For comparative purposes, we also make preliminary estimates of the effect of monetary union on three other dimensions of economic performance: foreign direct investment, the development of financial markets and overall macroeconomic performance, though we recognize that our ability to control for other factors is more limited in respect of these other indicators. The evidence suggests that inward investment in the countries outside would have been greater had they joined EMU, but that the impact of this on GDP would be no more than 0.3% of GDP per annum for the UK and less than that for the other 'outs'. Financial market activity shows no clear sign of having been affected by EMU, and London's position as Europe's financial centre remains, as yet, largely unchallenged. On standard measures of aggregate performanceinflation, unemployment and output -no clear pattern of EMU effects has yet emerged.

The Euro and European financial market dependence

“…At the same time, significant increases in trade between Euro countries as well as trade with outside countries have been observed after the introduction of the Euro, indicating stronger integration of the real sector (e.g. Barr et al, 2003;Micco et al, 2003). Since capital market integration and increased trade embed a prediction about the dependence between markets (Bekaert et al, 2005;Goetzmann et al, 2005), we conjecture that the degree of dependence between the equity markets of the countries in the Euro area has increased after the launch of the common currency.…”

Benefits of EMU Participation: Estimates Using the Synthetic Control Method

“…There are more early papers on this topic, such as Barr et al (2003), Micco et al (2003) and Flam and Nordström (2006), that all report sizable and significantly positive trade effects of the euro. Baldwin et al (2008) find that the euro has promoted trade and foreign direct investment significantly, and identify the relative price channel and the newly-traded goods channel as the main channels for this effect.…”

The Real Effects of the Euro: Evidence from Corporate Investments

“…Micco, Stein, and Ordóñez (2003) estimate that the euro has increased trade between 4 percent and 16 percent among the euro-countries without any evidence of diverting trade from other countries. Barr, Breedon, and Miles (2003) obtain a higher estimate, 29 percent, for the increase in trade among the euro-countries, whereas Bun and Klaassen (2002) …nd that the euro has increased trade by 4 percent initially and the estimated increase in the long-run would be 40 percent. However, even if the estimated trade e¤ects led to signi…cant increases in national incomes, corporate pro…ts would not necessarily increase by the same amount, if at all.…”