Towards European Monetary Integration: The Evolution of Currency Risk Premium as a Measure for Monetary Convergence Prior to the Implementation of Currency Unions

The question of whether or not to adopt the euro is a very important one, not only for the 13 European Union members that do not share the same currency, but also for future EU candidates. Current literature on the effect of the euro on trade is scarce since the European Monetary Union (EMU) was officially created in 1999, and up until recently there has not been enough data to analyze this issue. This paper aims to estimate the effect of the euro on trade between member countries using the standard gravity model of trade. Using data from current 25 EU members over the period from 1997 to 2004, I show that higher trade volumes between EMU members cannot be attributed to the adoption of the euro. I find evidence that the euro adoption has had a short-run effect on bilateral trade and that this effect is eliminated over a short period of time. My findings suggest that members of the EMU trade on average from 8.8% to 47% more compared to non-members depending on the type of regression used, while members of the Free Trade Agreement trade 61.3% more. The effect of the euro on trade is eliminated as soon as I control for country-pair specific effects that include the FTA effect as well as history of trade relations between two countries. I conclude that the adoption of the euro should be seen as a final step in the European economic and monetary integration for countries that already benefit from relatively high volumes of bilateral trade. Full text availale at: https://doi.org/10.22215/rera.v2i1.166

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European monetary integration, TFP and productivity convergence

Economics Letters ◽

10.1016/j.econlet.2020.109696 ◽

2021 ◽

Vol 199 ◽

pp. 109696

Author(s):

Sotiris K. Papaioannou

Keyword(s):

Monetary Integration ◽

European Monetary ◽

Productivity Convergence

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Italy's policy towards European monetary integration: Bringing ideas back in?

Journal of European Public Policy ◽

10.1080/1350176042000298129 ◽

2004 ◽

Vol 11 (6) ◽

pp. 1096-1111 ◽

Cited By ~ 16

Author(s):

Lucia Quaglia

Keyword(s):

Monetary Integration ◽

European Monetary

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The long march to European monetary integration

Central Banking in the Twentieth Century ◽

10.1017/cbo9780511782053.015 ◽

2011 ◽

pp. 259-276

Author(s):

John Singleton

Keyword(s):

Monetary Integration ◽

European Monetary

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Monetary Integration, Fiscal Divergence and Current Account Imbalances in Europe

The Economists Voice ◽

10.1515/ev-2018-0026 ◽

2018 ◽

Vol 15 (1) ◽

Cited By ~ 5

Author(s):

Gunther Schnabl

Keyword(s):

Fiscal Policy ◽

Monetary Union ◽

Current Account ◽

European Monetary Union ◽

Exchange Rate Regime ◽

Early Years ◽

Monetary Integration ◽

Fiscal Policies ◽

European Monetary ◽

Panel Regressions

Abstract The paper scrutinizes the role of diverging fiscal policy stances for diverging current account positions in Europe with a focus on the European Monetary Union (EMU). In a heterogeneous monetary union fiscal policy has the task to absorb asymmetric shocks to ensure the efficacy of the one-size monetary policy. It is argued that since the early years of the European Monetary Union divergent fiscal policies combined with monetary expansion constituted a major determinant of current account divergence within the euro area, which finally led into the European debt and financial crisis. Panel regressions reveal a significant impact of fiscal policies on current account positions, which to a large extent are independent from the exchange rate regime and turn out to be contingent on monetary and fiscal policy mix. Based on the findings economic policy recommendations are presented.

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