The EMU (Euro) and economic growth


« The bigger a lie, the more one believes it. » Joseph Goebbels.


The discourse of experts has announced for years that the implementation of the Economic and Monetary union, in other words, the « Eurozone, » would have extremely positive effects on the economies of the member states. Relatively recent and solidly supported academic research contradicts these claims.

Initial Discourse and Illusions

The illusion has been spread widely that a monetary zone featuring a single currency would generate a very sharp increase in trade flows among the member countries. It arose from theoretical as well as empirical writings, particularly those of Andrew K. Rose[1]. These writings, which were based on a gravity model [2], gave great importance to the geographic proximity of the partners. Giving rise to what has been called the “Rose effect,” and to a literature extremely favorable to Monetary Unions, it described national currencies as an “obstacle” to international trade [3]. Monetary integration was supposed to bring about a better correlation of the business cycles among countries [4]. It was also meant to lead to an accumulation of knowledge, bringing about a strong increase in production and potential exchanges [5].

In a sense, the Monetary Union was going to create the conditions for the success of an « Optimal Monetary Zone » [6], following dynamics which would appear to be endogenous [7]. Whence the now famous statements made by various politicians, to the effect that, by its sole existence, the Euro would bring about strong growth among the member states. To the point that  Jacques Delors and Romano Prodi could maintain that the Euro would further European growth by 1% to 1.5% [8].

In the wake of these works, others were implemented refining the hypotheses used by Rose, and resulting in a considerable reduction in the size of the positive effects of Monetary Union [9] ; these remained high nevertheless, with an increase of trade between the member countries of the zone projected to be comprised between 20% and 40%[10]. There was no doubt left then, in the minds of those experts, that the introduction of the Euro would have an extremely positive effect on the economies of the members countries.

Doubts and criticisms

Yet their writings have been strongly criticized on the grounds of the econometric method used [11]. Especially the models of the estimation of international trade by the so-called “gravitation” method, if they lend themselves well to bilateral trade, do not seem to be adequate to analyze a zone made up of a number of countries. Moreover, and this is a more fundamental criticism, these models do not seem to take into account the persistence of international trade [12] which can be explained by various phenomena, including asymmetries in information. On top of it, these models neglect the existence of endogenous factors in the development of trade, which are not affected by the existence – or non-existence – of a Monetary Union.

These various elements have brought about a more fundamental reconsideration of the results  of A.K. Rose’s initial study. Capitalizing on nearly twenty years of research on international trade and on gravity models [13], Harry Kelejian (with G. Tavlas and P. Petroulas) have reconsidered the various estimations of the effects of monetary union on the international trade of member countries [14]. With devastating results.

The impact of the Economic and Monetary Union onto the trade of its member states is here estimated at a growth of 4.7% to 6.3%, which is very far from even the most pessimistic estimations in the earlier works, which had put these effects at a minimum of 20%, and this without even harking back to Rose’s initial writings, which estimated them at between 200% and 300%. In a span of ten years, we have therefore witnessed a decrease of, at first, 10 to 1 (from 200% to 20%[15]), a decrease which occurred rapidly, and then again another decrease, reducing the size of these effects from 20% to an average of 5% (a factor of 4 to 1) [16]. The persistence effects in trade seem to have been largely underestimated and, inversely, the positive effects of monetary union to have been just as largely overestimated, quite possibly for political reasons. One cannot help but notice that the most extravagant announcements about the positive effects of the Economic and Monetary Union (with estimates of increase of intra-zone trade in the order of 200%) were made at the very moment that the Euro was introduced. The lie was very big indeed… These announcements have clearly served as a justification for the policies and the politicians of the time. The same arguments are being reused today to give credit to the idea that a dissolution of the Euro would lead to a catastrophe, with the same numbers being used again to the ends of propaganda, of «Funkpropaganda », but this time in an inverted manner, in order to “predict” a collapse of the international trade of the countries concerned, and therefore a fall in GDP in the case of an exit from the Euro. However, if the effect on international trade created by a monetary zone is weak, one must deduce inversely that the effect of prices (what is called “cost competitiveness”) is significantly above that which is stated by the dominating discourse [17]. This gives back all its importance to devaluations to restore the competitiveness of some countries. Benjamin Disraeli is known to have said “there are lies, damned lies and statistics”. One can then add “and econometrics too…”.

Return to reality

In reality, growth in the Eurozone has been inferior to that of its partners from the moment the single currency was introduced.

Chart 1

Growth rate of GDP at constant prices. Averaged over a period


Average 2001-2011

Average 2001-2007

Average 2007-2011





















United Kingdom




United States








Total OECD




Difference to the OECD average




SOURCES : Database of OECD. For 2011, estimations. For 2010, preliminary figures.

Sources and methods, ( ).

These figures have been corrected by the number of work days.

Note : The implementing of the national accounts systems SCN93 and SEC95 has progressed at an unequal rhythm among countries of the OECD, as much as regards the variables as the periods covered. As a result, several of the national series are displaying breaks. Moreover, several countries use chain price indices in order to calculate real GDP and the components of expenses. See the chart  «Systèmes de comptabilité nationale, années de référence et dernières mises à jour» at the beginning of the statistical annex, as well as Perspectives économiques de l’OCDE. One notices that, compared with the OECD average, the Eurozone has experienced a growth inferior by 0.5% to 0.7%. This could be the result of the introduction of the single currency which has acted as an enormous brake to the economic activity of the member states [18]. From this point of view, one is struck by the fact that, since the introduction of the Euro, the role of Europe on the international economic stage has not stopped decreasing.

Yet it must be pointed out that the impact of national economic policies implemented in the countries of the zone precisely in response to the introduction of the single currency have had a considerable importance on the individual trajectories taken by these countries. For instance, the increase in public debt in France was largely related to compensating the negative effects of the Euro onto growth. Thus, the impact of the Euro is not only manifest on growth but on the totality of the indicators, including the budgetary indicators and public debt. From this point of view, far from resulting in a convergence of economic dynamics and of the “business cycle,” the introduction of the Euro has been marked by an increasing divergence within the zone itself.

Chart 2

Growth rate within the Eurozone








































Eurozone (12 countries)



Total OECD



Typical difference of Eurozone as % of average



Min-Max difference in percentage of average growth in the Eurozone.



Source : Database of Economic Perspectives of the OECD, no 88.

In the French case, successive governments have chosen to hold up a strongly expansionist budgetary policy in order to compensate for the impact of the Euro on growth. This has allowed France not to suffer too much from the implementation of the Euro, but with the consequence of a soaring public debt. If one takes into account all the aspects of economic policy, it becomes clear that the Euro has had for some 15 years now an extremely negative effect on the economies of the member countries. The introduction of the single currency has indeed been a tragic experiment, the price of which the member countries have not yet paid in full.

Kindly translated by Anne-Marie de Grazia

[1] Rose, A.K. (2000), « One money, one market: the effect of common currencies on trade », Economic Policy Vol. 30, pp.7-45 et Rose, Andrew K., (2001), “Currency unions and trade: the effect is large,” Economic Policy Vol. 33, 449-461.

[2] Anderson, J., (1979), “The theoretical foundation for the gravity equation,”

American Economic Review Vol. 69, n°1/1979 106-116. Deardorff, A., (1998), “Determinants of bilateral trade: does gravity work in a neoclassical world?,” in J. Frankel (ed.), The regionalization of the world economy, University of Chicago Press, Chicago.

[3] Rose, A.K., Wincoop, E. van (2001), « National money as a barrier to international trade: the real case for currency union », American Economic Review, Vol. 91, n°2/2001, pp. 386-390.

[4] Rose, A.K. (2008), « EMU, trade and business cycle synchronization », Paper presented at the ECB conference on The Euro of Ten: Lessons and Challenges, Frankfurt, Germany, 13 et 14 novembre

[5] De Grauwe, P. (2003), Economics of Monetary Union, New York: Oxford University Press. Frankel, J.A., Rose A.K. (2002), « An estimate of the effect of currency unions on trade and output », Quarterly Journal of Economics, Vol. 108, n°441, pp. 1009-25.

[6] On this topic, look up the Master 2 thesis written by one of my students, Laurentjoye T., La théorie des zones monétaires optimales à l’épreuve de la crise de la zone euro, Formation « Économie des Institutions », EHESS, Paris, septembre 2013.

[7] Frankel, J.A., Rose A.K. (1998), « The endogeneity of the optimum currency area criteria », Economic Journal, Vol.108, 449, pp.1009-1025. De Grauwe, P., Mongelli, F.P. (2005), «Endogeneities of optimum currency areas. What brings countries sharing a single currency closer together? », Working Paper Series, 468, European Central Bank, Francfort.

[8] Sapir J. (2012), Faut-il sortir de l’Euro ?, Le Seuil, Paris.

[9] Bun, M., Klaasen, F. (2007), « The euro effect on trade is not as large as commonly thought», Oxford bulletin of economics and statistics, Vol. 69: 473-496. Berger, H., Nitsch, V. (2008), « Zooming out: the trade effect of the euro in historical perspective », Journal of International money and nance, Vol. 27 (8): 1244-1260.

[10] Glick R. et A.K. Rose, (2002), « Does a Currency Union Affects Trade ? The Time Series Evidence », in European Economic Review, n° 466, pp. 1125-1151.

[11] Persson T. (2001), « Currency Unions and Trade : How Large is the Treatment Effect ? » in Economic Policy, n°33, pp. 435-448 ; Nitsch V. (2002), « Honey I Shrunk the Currency Union Effect on Trade », World Economy, Vol. 25, n° 4, pp. 457-474.

[12] Greenaway, D., Kneller, R. (2007), « Firm hetrogeneity, exporting and foreign direct investment », Economic Journal, 117, pp.134-161.

[13] Flam, H., Nordström, H. (2006), « Trade volume effects of the euro: aggregate and sector estimates », IIES Seminar Paper No. 746. Baldwin R. (2006) « The euro’s trade effects » ECB Working Papers, WP n°594, Francfort. Baldwin R. et al. (2008), « Study on the Impact of the Euro on Trade and Foreign Direct Investment », Economic Paper, European Commission, n° 321.

[14] Kelejian, H. & al. (2011), « In the neighbourhood : the trade effetcs of the euro in a spatial framework », Bank of Greece Working Papers, 136

[15] From the initial work by A.K. Rose going back to 2000 but carried out in fact between 1997 and 1999 « One money, one market: the effect of common currencies on trade », Economic Policy 30, op.cit., to the work of R. Glick and A.K. Rose, dated 2002, « Does a Currency Union Affects Trade ? The Time Series Evidence », op. cit..

[16] Bun, M., Klaasen, F. (2007), « The euro effect on trade is not as large as commonly thought», Oxford bulletin of economics and statistics, op.cit., even go so far as to estimate the « positive » effect of EMU to 3%, which puts it easily within the spread of error range of error of estimates of this kind.

[17] This is by the way the gist og a note written by P. Artus, « C’est la compétitivité-coût qui devient la variable essentielle », Flash-Économie, Natixis, n°596, 30 August 2013.

[18] Bibow J. and A. Terzi (eds), (2007) Euroland and the World Economy: Global Player or Global Drag?, New York (NY), Palgrave Macmillan.


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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