Has the Euro Paid Off? A Study of the Trade‐Induced Welfare Effects of the EMU

Abstract This paper aims to provide policy‐relevant insights into the effect of the euro on trade. It uses a new data set of bilateral international and intranational manufacturing trade flows for 69 countries over the period 1986−2016. A general equilibrium gravity model is estimated to quantify the welfare effect of the euro and its impact on consumer prices and producer prices within countries (i.e., distributional effects). The results of three counterfactual experiments indicate that the euro has successfully increased welfare for the Economic and Monetary Union (EMU) and non‐EMU member countries. The results suggest that a two‐speed euro design would have further increased welfare, with some heterogeneity within countries. The growth effects of the euro are mainly driven by trade creation outside the EMU. This finding raises questions over the cohesiveness of the euro area as an optimum currency area.