What Went Wrong with the EMS and European Monetary Union

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 Union

10.1007/978-3-642-59039-9 ◽

1997 ◽

Cited By ~ 2

Keyword(s):

Monetary Union ◽

European Monetary Union ◽

European Monetary

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Trends in the European Monetary Union. An Overview

Global Business Review ◽

10.1177/09721509211016192 ◽

2021 ◽

pp. 097215092110161

Author(s):

Papageorgiou Christos ◽

Anastasiou Athanasios ◽

Liargovas Panagiotis

Keyword(s):

Monetary Union ◽

European Monetary Union ◽

Inflation Rate ◽

European Monetary ◽

Member States ◽

Eu Member States ◽

Average Value ◽

General Government ◽

Government Deficit ◽

The Mean

Four indicators corresponding to the four targets of the European Monetary Union were calculated. The study showed that: (a) concerning the deviation of state’s general government deficit/surplus from 3% of gross domestic product (GDP), all member states had reached their target, with the exception of Cyprus, which was slightly under the target, (b) concerning the deviation of state’s general government debt from 60% of GDP, half of all European Union (EU) member states did not reach their targets, and there was a lot to be done, especially from the EU15 member states, (c) concerning the deviation of state’s inflation rate from the mean of the three states with best results of +1.5%, it was observed that the average value of EU28 member states had reached the final target, mainly due to the performances of the EU15 member states, (d) and concerning the deviation of state’s interest rate from the mean of the three states with the best results of +2%, it was observed that the average value of EU28 member states had reached the final target.

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