Revisiting the Euro’s Trade Cost and Welfare Effects

When, about twenty years ago, the Euro was created, one objective was
to facilitate intra-European trade by reducing transaction costs. Has the Euro
delivered? Using sectoral trade data from 1995 to 2014 and applying structural
gravity modeling, we conduct an ex post evaluation of the European Monetary
Union (EMU). In aggregate data, we find a significant average trade effect for
goods of almost 8 percent, but a much smaller effect for services trade. Digging
deeper, we detect substantial heterogeneity between sectors, as well as between
and within country-pairs. Singling out Germany, and embedding the estimation
results into a quantitative general equilibrium model of world trade, we find that
EMU has increased real incomes in all EMU countries, albeit at different rates.
E. g. incomes have increased by 0.3, 0.6, and 2.1 percent in Italy, Germany, and
Luxembourg, respectively.