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Euro: Higher Real Incomes in All Member States Due to Trade Facilitation

15.03.2019

With regards to trade effects, the creation of the euro is a success for all member states. The single currency reduced transaction costs and thus increases real incomes for all member states. In particular, trade in goods is intensified by the euro. Luxembourg and Belgium benefit the most, Italy and Greece the least. Germany is in between.

This is shown by an analysis of trade data from 1995 to 2014 by the authors Gabriel Felbermayr, President of the Kiel Institute for the World Economy (IfW Kiel) and Marina Steininger of the ifo Institute, which has now been published as a Kiel working paper. According to this paper, the euro lowers transaction costs between member states, thus increasing trade activity and real incomes, in some cases significantly. The identified positive effects are triggered by joining the monetary union and then have a lasting effect. They apply to all member states.

Small and centrally located countries as well as the Baltic countries benefit most. Compared to a scenario in which the euro would not have existed, Luxembourg recorded a real income increase of 2.1 percent, Belgium and Estonia of 1.4 percent, Latvia of 1.3 percent, the Netherlands of 1.2 percent, and Slovenia of 1.1 percent.

Among the large EU countries, real income rose most in Germany (0.6 percent), France (0.5 percent) and Spain (0.4 percent). Italy and Greece benefited least, each with a plus of 0.3 percent. "The figures contradict the frequently expressed opinion that only Germany and a few other countries benefited from the euro. The common currency is more successful than it is often perceived and contributes to real income gains in all euro countries," said Gabriel Felbermayr.

In particular, the Euro increases trade in goods between the member states; on average by 8 percent in the period under review. Cross-border services in the euro zone are promoted by the common currency, too, but by much less: they increased on average by only about 1 percent. In Germany, the euro has created additional value for the chemical and food industries in particular, but has accelerated the migration of the textile industry. In service sectors, positive value-added effects can be identified throughout, especially for the aviation industry.

“So, the Euro has fulfilled some of the promises made at its introduction. This success should, however, not divert attention from the fact that major efforts towards improving the institutional framework are still needed to make the common currency a lasting achievement,” said Felbermayr.

Read full Kiel Working Paper

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