Think tank europe

The Impact of the Euro on International Trade and Investment

17/12/2009
Author : Swedish Institute for European Policy Studies (SIEPS)
Report by Harry Flam
 
The common currency, the euro, and the common monetary policy were introduced in the EU in 1999 to improve the internal market, under the slogan “One Market, One Money”. It was expected that the common currency would promote more trade and investment between the countries that joined the European currency union.

In the report The Impact of the Euro on International Trade and Investment: A Survey of Theory and Empirical Evidence, Professor Harry Flam evaluates the studies that have estimated the effect of the euro on trade and foreign direct investments (FDI) in the EU. Flam concludes that trade between the euro countries is higher by 10 to 30 %, the most likely explanation being the complete elimination of nominal exchange rate uncertainty. Flam also concludes that the euro has had a positive impact on FDI between euro countries as well as on FDI from non-euro countries, but notes that this conclusion is less certain.

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1 COMMENT(S)
  • Re:The Impact of the Euro on International Trade and Investment

I think what's normally overlooked in context of Maastricht Treaty and introduction of the single european (euro) monetary system is the national banking and financial infrastructure mechanisms which member countries have not (yet) fully implemented, including national banking regulatory reforms. However, after the global financial meltdown, it'd seem appropriate for Ecofin to revaluate the operations of the single market mechanism and constraints to its optimal base operations.

International trade will improve further as euro member countries provide block symmetry and, as a result, optimal synergies for FDI. Emerging markets have demonstrated their confidence in Euro including as a global reserve currency. I suspect this global trend will invariably increase under ECB management.

However UK, Sweden, Denmark and other's have yet to adopt euro as a national currency. Conservative Party victory in next UK elections may spell serious problems not only on the monetary front but more seriously on fiscal policy.

By Hari Naidu on 1/4/2010 21:40
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