The Effects of the Euro on Intra-Euro Area Exports

Abstract

An important argument for the adoption of the euro was the expectation that it would boost trade. Existing theory suggests several channels through which the euro would enhance trade. First, eliminating exchange rate uncertainty reduces the risks associated with trading when different currencies are in use. Second, eliminating transaction costs related to operations in different currencies is likely to lead to an increased volume of trade. Third, increased price transparency fosters competition among firms and leads to a fall in the mark‐up which in turn is expected to increase the volume of bilateral trade. Fourth, the single currency could improve the ability of euro area countries to hedge against exchange rate risk in their trade with non‐euro area countries. This suggests that the euro might also boost trade with countries outside the euro area. However, existing empirical evidence on euro‐enhanced trade is inconclusive.