Foreign exporters use euro to create new markets

 

 

With the introduction of the single currency the euro area became a more attractive market, especially to non-EMU exporters. These are the new findings in a recent CEPR paper by Richard Baldwin and Virginia Di Nino (Dec. 2006). They use disaggregated bilateral trade flows among 20 nations with about 16 million observations to test whether the euro is stimulating the export of new products rather than simply increasing the volume of already traded goods. Their work is an important innovation because - unlike the previous literature - it specifically focuses on product categories, where no bilateral trade has been recorded before. The new good theory emerged as a response to the puzzle that there seemed to be no price effect from increased trade and that the euro did not cause a significant trade diversion from trade with non-EMU towards other EMU countries. The empirical question was how the euro usage affected the likelihood that a particular product category is traded between two nations when one or both use the euro.

 

The most surprising result is that the common use of the euro had a big effect on outside firms, who were not trading with any euro area market before. The single currency induced firms to export products that they had previously sold only domestically. Among the non-euro area countries, exporters from the UK have benefited most, both in new but also in already existing trade categories. This contradicts the often heard political argument that UK’s decision not to join the monetary union was harmful for the export sector. Imports from the euro area were also stimulated by the introduction of the single currency. The findings seem remarkably robust across countries (Denmark, Switzerland, Iceland, Norway, Japan, US, Canada). The only exception here is the UK, where imports from the euro area in previously un-traded areas seem to have been diminished with the introduction of the euro. This is the only sign of diversion that does not seem to affect overall trade benefits for the UK.

 

The effect of the single currency on trade between inside firms is mixed. The euro boosted intra-Euro area trade but only modestly. These results confirm earlier findings in the literature (see ECB paper by Richard Baldwin (March 2006) for an excellent literature overview). Spain seemed to have benefited most from euro area’s adoption of a single currency. Also benefited have the small countries Greece, Portugal, Finland and Austria. In contrast, there is no evidence that firms have benefited from a larger euro area market in the three biggest member countries  - Germany, France, and Italy. These poor findings may be underestimating the true potential of trade expansion since the given time period is short (1995-2003) and several member countries, including the three largest countries, experienced an economic downturn in at least 2 out of 5 years since the start of the euro area.

 

mundschenk(at)eurointelligence.com

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