Economics played little role in the decision to create the euro – politics was king. Going forward, however, economics moves to centre stage. Should the euro area worry about admitting new members who are economically very different from incumbents? What are the costs and benefits of euro adoption for potential joiners? Are the famous Maastricht Criteria the right economic tests for potential members? How worried should the European Central Bank be about unsynchronised booms and busts in the euro area?
The microeconomic effects of the euro are at the heart of these questions since they determine the extent to which euro usage will foster economic integration among incumbents and joiners. Two microeconomic effects are critical – the impact on international capital flows, and the impact on international goods flows, i.e. trade.
This report marshals the best available empirical evidence on the size and nature of the euro's pro-trade effects and groups the policy implications of these findings into two broad categories – lessons for potential joiners; and lessons for the euro area’s current members and its economic management.