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Building on the Euro

The euro is now six years old. It is past time to consider how it is performing, and whether it has lived up to the expectations that accompanied its birth.

Those expectations were not modest. By reducing transaction costs and removing exchange-rate uncertainty, the single European currency was expected to lead to fully integrated product and financial markets. This, in turn, would bring greater gains from trade, stronger competition, larger cross-border capital flows, lower borrowing costs, and more opportunities for sharing risk, all of which were expected ultimately to boost investment and productivity.

Reality has disappointed. Compared to the five years before the euro’s launch in 1999, productivity growth has since slowed in Italy, Germany, Spain, and the Netherlands, while over the same period it accelerated or remained constant in Denmark, Sweden, and the UK, the European Union members that remained out. Indeed, with the main exception of France, the euro does not seem to have been a blessing for the countries that adopted it.

Why this disappointment? Have the expected benefits of the new currency failed to materialize? Several recent economic studies addressed this question, looking at a variety of indicators.