Currency Unions and International Trade : The Case of the Euro

Sammanfattning: The efficiency and practicality of currency areas is a controversial source of debate in the field of economics nowadays. Advocates of the system predict that currency unions lead to higher trade volumes as a result of reduced exchange rate uncertainty and higher integration. Possibly the most prominent example of a currency area nowadays is the EMU, initiated in 1995 with the purpose of nurturing a unified European market as one of the main aims. There is no consensus on whether the EMU has induced a net loss or benefit upon its members, but one common finding among academic studies is that the EMU leads to higher trade among union members. The purpose of this study is to evaluate the impact of the euro adoption on trade between EMU members. The model uses a pooled data set comprising the years from 1990 to 2012. Two separate groups are analysed, one including all OECD and EU countries, and another using data from only European countries from the sample. After allowing for different circumstances, I find that two countries belonging to the EMU trade between 17 and 32 per cent more than country pairs outside the union. Moreover, I find that language similarity has a neutral effect in the European sample, while it seems to have a highly significant effect on the sample including all countries.