To Adopt or Not to Adopt: Heterogeneous Trade Effects of the Euro

TL;DR

This paper investigates the heterogeneous trade effects of euro adoption across country pairs, revealing significant variation driven by pre-existing trade relationships and economic factors, with some countries experiencing trade diversion or gains.

Contribution

It provides the first comprehensive analysis of heterogeneity in euro trade effects using detailed EU data, highlighting the importance of country-specific factors and fixed effects in estimating impacts.

Findings

Average trade increase of 29% with heterogeneity from -12% to +79%

Core eurozone pairs show large gains, peripheral pairs smaller or negative

Pre-euro trade intensity and GDP explain over 90% of heterogeneity

Abstract

Two decades of research on the euro's trade effects have produced estimates ranging from 4% to 30%, with no consensus on the magnitude. We find evidence that this divergence may reflect genuine heterogeneity in the euro's trade effect across country pairs rather than methodological differences alone. Using Eurostat data on 15 EU countries (12 eurozone members plus Denmark, Sweden, and the UK as controls) from 1995-2015, we estimate that euro adoption increased bilateral trade by 29% on average (14.1% after fixed effects correction), but effects range from -12% to +79% across eurozone pairs. Core eurozone pairs (e.g., Germany-France, Germany-Netherlands) show large gains, while peripheral pairs involving Finland, Greece, and Portugal saw smaller or negative effects, with some negative estimates statistically significant and interpretable as trade diversion. Pre-euro trade intensity and GDP account for over 90% of feature importance in explaining this heterogeneity. Extending to EU28, we find evidence that crisis-era adopters (Slovakia, Estonia, Latvia) pull down naive estimates to 4.3%, but accounting for fixed effects recovers estimates of 13.4%, consistent with the EU15 fixed-effects baseline of 14.1%. Illustrative counterfactual analysis suggests non-eurozone members would have experienced varied effects: UK (+33%), Sweden (+22%), Denmark (+19%). The wide range of prior estimates appears to be largely a feature of the data, not a bug in the methods.