The Euro and trade effects: Implications for Denmark

Sophia-Marie Klages & Leif Erik Stang Holst

Student thesis: Master thesis

Abstract

The establishment of the European Economic and Monetary Union was partly driven by expectations of being beneficial for the economies of the member states. Benefits were expected to be achieved through the elimination of transaction costs, reduced exchange rate risk, and greater competition (IMF, 2007). Additionally, given that all the above mentioned economical benefits are eventually expected to have an influence on European trade patterns, the question arises, how the introduction of the Euro affected trade for its member states and their other European counterparts. More interestingly, can Euro-outsiders expect to gain in trade when joining the currency union? This question was analysed with focus on Denmark throughout this paper. Denmark is currently using a fixed-exchange rate system as the country follows a very tight peg to the Euro. Hence, Denmark is unique in the way that the elimination of exchange rate variability as mentioned above is not expected to have a significant effect on its overall trade levels. In order to provide a reliable answer to the question of trading gains for Denmark if adopting the Euro, several different approaches were applied. Theoretical background and previous research on this topic showed the existence of gains in trade upon joining a currency union. Despite the lack in data on the European platform, past research has found an effect between 9% and 29% depending on the approach applied. In addition the graphical analysis showed that after 1997 developments of the intra-Eurozone trade and trade between Denmark and the Eurozone diverged to an average of around 16%. In order to provide a more reliable answer, an extensive statistical analysis was performed applying seven different models on two different approaches. Overall, Denmark is expected to experience a trade gain with other Eurozone countries of 9%. This is in the lower end of what has been presented in previous research. Another interesting aspect is the expected gain in trade of 15% with other European countries in the dataset. This answer was not provided by many previous articles. Furthermore, the statistics in this research show that Denmark would not gain from the further elimination of the exchange rate variability towards the Euro. Altogether, Denmark would experience an overall gain in trade with its European trading partners of approximately 11.5%, which is expected to lead to a minimum gain in Denmark‟s GDP of 0.43%.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2010
Number of pages164