Trade Effects of the Euro. Small Countries, Large Gains!

Several studies suggest that the introduction of the Euro has triggered sizeable increases in intra-Euro area trade. In this paper we test whether these gains are distributed asymmetrically among Euro area countries with respect to country size. This hypothesis is motivated by Casella (1996), who postulates that small countries of a trade bloc gain more from its enlargement. We argue that the implications of this model do also apply to the introduction of a common currency and test for a small country bonus using aggregate trade data and disaggregated trade data at the SITC1, SITC2, and SITC3 level. The results suggest that there is indeed strong evidence for a small country bonus with respect to the gains from trade after the introduction of the Euro. On average, the Euro triggered a reallocation of intra-Euro area exports to small countries by some 6 percent.