The Impact of the Euro on International Trade and Investment

Abstract:

The common currency, the euro, and the common monetary policy were introduced in the EU in 1999 to improve the internal market, under the slogan “One Market, One Money”. It was expected that the common currency would promote more trade and investment between the countries that joined the European currency union.

In the report The Impact of the Euro on International Trade and Investment: A Survey of Theory and Empirical Evidence, Professor Harry Flam evaluates the studies that have estimated the effect of the euro on trade and foreign direct investments (FDI) in the EU. Flam concludes that trade between the euro countries is higher by 10 to 30 %, the most likely explanation being the complete elimination of nominal exchange rate uncertainty. Flam also concludes that the euro has had a positive impact on FDI between euro countries as well as on FDI from non-euro countries, but notes that this conclusion is less certain.