EMU and Trade Revisited: Long‐Run Evidence Using Gravity Equations

In this paper, we present evidence of the long‐run effect of the euro on trade for the twelve initial EMU countries for the period 1967–2008 from a double perspective. First, we pool all the bilateral combinations of trade flows among the EMU countries in a panel cointegration gravity specification. Second, we estimate a gravity equation for each of the EMU members vis‐à‐vis the other eleven partners. We apply panel cointegration techniques based on factor models that account for cross‐dependence and structural breaks. Whereas the joint gravity equation provides evidence on the aggregate effect of the euro on intra‐European trade, by isolating the individual countries, we assess which of the member countries have obtained a larger benefit from the euro. The results show that the euro has had a positive though small effect on trade. Belgium and Luxembourg, France and Italy are the countries more benefited from the introduction of the euro. The effects for exports to third countries are in general more moderate, and, with the exception of Greece, there is no evidence of diversion effects.     

The Euro's place in the world monetary system

The European Union is striding ahead on schedule towards European monetary union (EMU). Eleven member states will introduce the euro for book-keeping purposes on 1.1.1999, assigning responsibility for monetary policy to the European System of Central Banks. On 1.1.2002, the euro will also be in circulation as notes and coins, and the participating countries will abandon their national currencies by 30.6.2002 at the latest. But what part will the euro play in the world monetary system? And what conclusions do we need to draw?     

Who Can Adjust to the Euro?

This study estimates potential exchange rate variation among 26 European countries during 1992–1998, as a proxy for the potential magnitude of adjustment they face to euro‐block membership, using the instrumental variable (IV) method, applying least squares cross‐section regression analysis based on optimal currency area theory. A currency union among Belgium, Denmark, France, Germany, Ireland, Malta, the Netherlands and Slovenia is found to entail a relatively light burden of adjustment for its members. The current membership of other countries in the euro‐block is potentially very demanding on their societies in the long term. This study also compares currency boards and independent central banks as alternative monetary frameworks for disinflation policies. Based on a pooled time‐series, cross‐section dataset of the same countries and years currency boards are found to be more effective in reducing inflation in all countries except Belgium. Balancing EMU's credibility gains against its adjustment costs, Finland, Greece, Italy, Portugal and Spain seem like unstable members of the euro‐block. For all new EU member states except the Czech Republic, Malta, Slovenia and Slovakia the advice is to stay out of the euro‐block until their economies are liberalised and flexible enough to withstand major adjustments, and their societal interest groups supportive enough of these adjustments.     

The Euro and the World Monetary system

Stage Three of European Economic and Monetary Union is scheduled to begin on 1st January 1999 at the latest; by 1st July 2002 the euro will probably be the only legal tender in the participating countries. The role of the European Central Bank and the euro in the international monetary system is still very unclear, however. This poses a risk for the intended independence of the ECB.     

Why price‐level dispersion went up in Europe after the financial crisis

Persistent price differences across euro area countries are an indication of incomplete economic integration. We analyse long‐ and short‐run developments of price‐level dispersion in the euro area and compare the results with price dispersion across US cities. We find that monetary and economic integration in Europe has been successful in establishing a major downward trend in price‐level differences across countries since 1960. After the Global Financial Crisis and the European Sovereign Debt Crisis, diverging economic conditions across euro area countries led to higher income dispersion, which contributed to a widening of price‐level differences again.     

The “Euro Illusion”: Illusion or Fact?

The changeover to the euro elicited an upsurge of research on the effects of the new currency on consumers’ conversion strategies, price estimates, price evaluations, choices, and purchases. This research includes longitudinal surveys, interviews, and controlled experiments, both natural and in the laboratory. The present article starts with an overview of this research after which it more specifically focuses on research showing an influence of the nominal value, as expressed in different currencies, on price evaluations and consumer choice. For most countries, the transition to the euro led to a lower nominal value currency. A bias known as the “euro illusion” has been documented such that the subjective value of money is influenced in the direction of the nominal value (i.e., in most countries prices and salaries seem smaller when expressed in euros than in the old domestic currency). Although the term was coined in connection with the euro changeover, the nominal representation of a currency has been shown to influence the subjective value of money in unfamiliar currencies other than the euro. Thus, tourists travelling abroad may frequently be subject to such an illusion. Different mechanisms have been proposed to account for the euro illusion. One is the numerosity heuristic and another the anchoring-and-adjustment heuristic in conjunction with biased conversion strategies. The size of the euro illusion is influenced by trade-offs between accuracy and effort. Consistent with this hypothesis, task importance, time constraints, familiarity with the conversion strategy, complexity of the conversion strategy, mood, and attitude towards the country or the currency all influence the size of the euro illusion.     

Leistungsbilanzungleichgewichte im Euroraum

The internal imbalances in the euro area are often cited as one of the main reasons for the crisis there. The surpluses, especially those of Germany, correspond to the deficits in the euro area problem countries — Greece, Italy, Ireland, Spain and Portugal. An analysis of the trade and services balances of the problem countries, however, shows that this was only true up to 2004. Since 2005 their deficits with the rest of the world have been bigger, especially with China. Now the imbalances with China, not Germany, are the main concern for euro area problem countries. The reasons for this development were the strong appreciation of the euro and the structure of the economies of the euro area problem countries, which brought them into direct competition with China. Revaluation of other currencies, especially the renminbi, would enable the euro area crisis countries to pursue growth-friendly fiscal consolidation in which stronger external demand replaces internal demand. This was how Germany consolidated its budget — lower fiscal deficits were compensated by external demand contributions. The problem countries could simultaneously shrink both their fiscal and external deficits. Internal devaluation through wage moderation, however, dampens domestic demand and is recessionary in the short term.     

Warum sich Deutschland der Rezession im Euroraum widersetzen kann

Germany is economically closely intertwined with the other member countries of the euro area. Some of these countries are in a deep recession, and it is feared that Germany will not manage to avoid being swept up by this economic burden for long. However, the German economy also benefits from the depreciation of the euro and low interest rates in the euro area — both of which are results of the economic slump in the euro area, too. In order to get an idea of the magnitude of these countervailing effects, we perform simulations with the RWI-Multi Country model.     

Ten misconceptions about current account imbalances in the euro area

In the pre-crisis period, substantial current account imbalances built up in the euro area. Despite recent progress in economic rebalancing, especially in the countries mostly affected by the euro debt crisis, a controversial debate is still raging about past causes, current interpretations and future outlooks for the current account positions of euro area countries. This article examines ten common claims often heard in the public debate and critically discusses their economic foundation.     

Aufschwung in Deutschland weiter kräftig — Anspannungen nehmen zu

The business cycle upswing in Germany has gained strength and breadth. In addition to private consumption, the expansion is now also supported by investment and foreign trade. The latter benefits from growing exports to the euro area, where the economy is gaining momentum. Since the euro area upswing rests on solid fundamentals, the ECB should be able to start tapering without putting the economy at risk.     

From dollarisation to euroisation

In the past the dollar has been so dominant as an international currency that the term ‘dollarisation’ has become a synonym for currency substitution, i.e. the voluntary use of a foreign currency instead of the respective country's own legal tender. This article addresses the question as to whether the euro may be expected to partly replace the US currency in this function, focusing on the former's use as a substitution currency in countries on the periphery of the euro zone. Some policy conclusions are drawn for both the ‘euroised’ economies and Euroland.     

Who Gains From Nominal Devaluation? An Empirical Assessment of Euro‐area Exports and Imports

In early 2013, rumours about the euro‐appreciation gained momentum, which may lead to decreases in exports and increases in imports of the member states. Therefore, we investigate the impact of changes in the nominal euro exchange rate vis‐à‐vis major currencies on export and import performance of nine different euro‐area countries. To disentangle the ‘true’ equilibrium elasticities Stein's unbiased risk estimate (SURE) system error correction models (SSECM) are estimated for nominal exchange rate changes versus the rest of the world or other major currencies. To differentiate between price level changes and changes of the nominal exchange rate, a country's export and import equation is estimated using separately the nominal rate and the relative price/unit labour cost as regressors. Results of Wald tests indicate that assuming both variables to have the same influence on exports and imports is misleading. Whether the relative price/unit labour costs elasticities are high or low depends crucially on which indicator is chosen, while the effect of nominal exchange rate changes can be estimated robustly for all countries in the sample. In particular, France and Spain are hit by a euro‐appreciation since their exports are highly exchange rate elastic. However, for France, this effect is at least partly offset by an also negative exchange rate elasticity of imports.     

Eurokrise: Erneute Atempause ist kein Grund zum Ausruhen

The current state of affairs in the euro area (EA) instills hope in economic recovery but also substantial concern. The crisis countries have made considerable, albeit quite uneven, progress in central areas of reform. Yet severe obstacles remain. Moreover, European policy makers have reformed the EA’s institutional framework to strengthen its resilience. Yet important elements of a stable architecture are still missing, and it remains unclear whether the EA is moving towards full integration or a Maastricht 2.0. Most importantly, since it has become impossible to construct a viable fi scal bridge due to the success of the OMT programme, now everything depends on the perseverance of domestic reform policies.     

The United Kingdom and the stability of the Euro area: From Maastricht to Brexit

The two key events expected to mark the year 2019 were the 20th anniversary of the euro and Brexit. This paper examines the role of the United Kingdom on the stability of the euro area. We study stability from the perspective of synchronisation of economic activity in a core and periphery framework. We show the UK, since 1990, has become significantly more integrated with the EU economy. The UK moved from the periphery before 1990 to the core afterwards. We also find that the level of synchronisation of the UK economy has had the highest variability over time among all countries.     

Differences in Information Requirements among European Citizens: More Psychology than Socio-Demographics

A review of recent research indicates that the socio-demographic characteristics of the citizens of the EU countries can explain differences in the attitudes towards the new common currency, the euro, only to a quite limited extent, and that the relationship between particular demographic characteristics, such as age, and attitudes varies substantially from one country to the next. Thus, in choosing target groups for information campaigns in connection with the introduction of the euro as well as in choosing the themes for the campaigns, other considerations have to brought to the fore. It is suggested that more attention be paid to national values, including the role that the currency plays as a source of national identity and pride; also here, substantial differences are found among countries. Furthermore, former behavioural experiences -- which also vary among countries -- must be taken into account. Likewise, information about micro-economic and macro-economic consequences has to be adapted to the the different attitudes and beliefs prevalent in the various European countries.     

Das Securities Market Programme — viele Vorteile für den Euroraum

The Eurosystem’s Securities Market Programme (SMP,) the purchase of government bonds of euro area countries strongly affected by the crisis, started in 2010 and ended in 2012. The SMP benefited all parties concerned – the Eurosystem, all euro area countries and the crisis countries. The positive experience with the SMP can be replicated in the private sector with the creation of an exchangetraded fund (ETF), a Smart Beta ETF - SMP Fund. Like the SMP, the SMP Fund would buy government bonds, according to the ECB capital key. As an ETF, the SMP Fund would have low costs. Profits above the German Bund benchmark would be shared: 80% to investors, 10% to the SMP Fund and 10% to advisers who recommend the purchase. The related risks would be reduced by the diversification of the SMP Fund, the financing mechanisms of the euro area, especially the European Stability Mechanism (ESM), the Outright Monetary Transactions (OMT) and the banking union. The SMP Fund could support the euro area fiscal capacity and the EU capital markets union. Past and future SMP profits create a fiscal capacity for the euro area with an initial amount of 50 billion Euro.     

Austritt einzelner Länder aus der Währungsunion: ein Szenario

The exit of a member state from the eurozone is often depicted as a catastrophic event that would lead to uncontrollable havoc in the financial markets. In this contribution, an alternative scenario is developed based on a consensual understanding. It describes a multi-year transition period during which all member states’ payments were automatically realised on the basis of a basket consisting of the euro and the new currency. In the remaining eurozone countries, the relative weight of the euro would increase over time, while it would decrease in the exit state. The hope is that the possibility of a smooth exit path would increase the bargaining power to change the governance rules of the eurozone.     

Consumer Adaptation Strategies: From Austrian Shilling to the Euro

On 1st January 2002, in 12 countries of the European Union, euro notes and coins replaced existing national currencies. The currency changeover required citizens to adapt in various ways. They had to learn to handle new coins and notes, and evaluate prices in the new currency. Data on how these tasks were performed by Austrians are presented. In particular, Austrian consumers applied four different strategies to establish price intuition for the euro: a conversion strategy, an intuitive strategy, an anchor strategy, and a marker value strategy. Data on these strategies show that their application varies across socio-demographic characteristics, differs with purchase situations, relates to euro attitudes, and changes over time. Although the introduction of the euro took place about 5 years ago, the adaptation process is still ongoing.     

The arrival of the Euro and its implications for Asia

The third stage of the European Economic and Monetary Union (EMU) commenced on January 1, 1999 with the launch of the European single currency, the euro. The first round of participants comprises 11 of the 15 European Union (EU) nations, dubbed “Euroland.” The potential implications of EMU for Asia are immense. The euro's emergence as an international currency and its impact on Asia can be assessed in 3 different domains: (1) as a medium of exchange for Europe's trade with Asia; (2) as a store of value in stocks and bonds in world capital markets; and (3) as part of official foreign exchange reserves of Asian central banks. Our analysis suggests that there is potential for the euro to play a bigger role in EU-Asia trade links, which will be underpinned by the collective importance of Euroland as a much-enlarged trading and investment partner for Asia. However, in the short term at least, Asian equity markets are unlikely to benefit from significant inflows of capital from the EU as the former have been decimated by the region's financial crisis. As for Asian bond markets, rapid deterioration of sovereign ratings of countries in the region over the past 12 months would make it difficult for Asian companies to raise funds through euro-denominated debt instruments. As for official foreign exchange reserves, the bulk of Asian reserves is currently held in US dollar assets. Judging from Asian trade and debt figures, it seems unlikely that the euro would challenge the US dollar as a reserve currency any time in the near future. Nevertheless, in the longer term, the euro's introduction could make it easier for Asian central banks to diversify their reserves from the greenback to the euro. The internationalization of the euro is likely to happen only gradually, whether in terms of international trade denomination and settlement, denominating international financial assets, or as a reserve currency. Since the magnitude of shock that the single European currency would bring to the international monetary system is still unknown, only very tentative conclusions for the impact on Asian countries can be drawn at this point in time.