Has the Euro Protected its Members from the "Great Trade Collapse"? – Preliminary results

The literature finds that the euro has increased trade by 3 to 30% between its members. The aggregate effects of the euro are quite well known. However the disaggregated effects of the euro have been much less studied: it is not clear which sectors have benefited the most from the euro or whether the euro has changed the production organization in the Eurozone (vertical specialization for example).

My question is, how does trade in the Eurozone behave in case of crisis? Is the additional trade due to the single currency "strong"? The financial crisis can be seen as a "stress-test" for the intra-euro trade. The great trade collapse can be used to reveal information about the European trade.

I study the shock of the financial crisis of 2008 because it is exogenous: it was not anticipated, it comes from a country outside of the Eurozone and it has hit all the European countries.

I use the database from Eurostat (trade and GDP) for all the members of the EU, plus Norway and Switzerland from 1995 to 2015. I do a difference in difference. I have two samples, a restricted one and an extended one. In the restricted sample, I compare the Eurozone members prior to 2008 (treatment group), with Denmark, Great Britain, Sweden, Switzerland and Norway (control group). In the extended sample, I compare all the Eurozone members with the rest of the European Union members plus Switzerland and Norway (in summary, I add east Europe countries). I am more comfortable with the results from the restricted sample, as the treatment group is closer to the control group.

export in percentage per country Figure1: Decrease of export in percentage per country between 2008 and 2009

Indeed, as you can see on figure 1, east Europe countries trade has better resisted to the crisis, while the effect on the members of the European Union prior to 2004 is more similar.

I find that with the restricted sample, the euro has a slightly positive, significant effect on trade during the crisis, while it is non-significant with the extended sample. The next step will be to check my results with other control groups, like the OECD members.

I have made some robustness checks: I used year, quarter and month data, I have changed the number of years before and after the crisis in my regression, I have used 2008 instead of 2009 as a reference year for the crisis, and I have changed the fixed effects. My results did not changed much.

The next stage will be to work at the sector level to see if the euro has protected all the sectors the same way during the great trade collapse, or if the heterogeneity is high. It will help to understand the channels through which the Euro has an impact on trade.

References

Baldwin, Richard. « The Great Trade Collapse: Causes, Consequences and Prospects ». VoxEU.org, 27 novembre 2009. http://voxeu.org/epubs/cepr-reports/great-trade-collapse-causes-consequences-and-prospects.

Bricongne, Jean-Charles, Lionel Fontagné, Guillaume Gaulier, Daria Taglioni, and Vincent Vicard. « Firms and the global crisis: French exports in the turmoil ». Journal of International Economics 87, no 1 (2012): 134 46. doi:10.1016/j.jinteco.2011.07.002.

Bussière, Matthieu, Jean Imbs, Robert Kollmann, and Romain Rancière. « The Financial Crisis: Lessons for International Macroeconomics ». American Economic Journal: Macroeconomics 5, no 3 (juillet 2013): 75 84. doi:10.1257/mac.5.3.75.

Glick, Reuven, and Andrew K. Rose. « Currency Unions and Trade: A Post-EMU Reassessment ». European Economic Review, 2016. http://www.sciencedirect.com/science/article/pii/S0014292116300630.

Micco, Alejandro, Ernesto H. Stein, and Guillermo Luis Ordoñez. « The Currency Union Effect on Trade: Early Evidence from EMU ». Research Department Publications. Inter-American Development Bank, Research Department, 2003. https://ideas.repec.org/p/idb/wpaper/4339.html.

Shelburne, Robert. « The Global Financial Crisis and Its Impact on Trade: The World and the European Emerging Economies ». ECE Discussion Papers Series. UNECE, 2010. https://ideas.repec.org/p/ece/dispap/2010_2.html.