1. 1 Euro : Effects on SMEs Profª Margarida Proença School of Economics and Management, Dean University of Minho

2. 2 “The Euro and the Democracy” New Bulgarian University New Bulgarian University 20-21 October, 2006 20-21 October, 2006 Atelier “I Mediterranei” Atelier “I Mediterranei”

3. 3 European monetary integration Optimal currency area ? Optimal currency area ? Significant convergence of nominal variables but Quite different GDP growth, labour productivity, unemployment rates Hein and Truger,2005;Frankel and Rose, 1999;Goodhart, 1998 Ex post

4. 4 Effects Institutional changes: Institutional changes: € Elimination of exchange rates € Independent central bank conducing monetary policy € Regulations for fiscal policies € Labour market and wage setting institutions Real convergence and prosperity?

5. 5 Optimal currency Areas Mundell (1961) Mundell (1961) Determine the optimum scope of an economic area with fixed exchange rates and common monetary policy Determine the optimum scope of an economic area with fixed exchange rates and common monetary policy Hip.: full employment equilibrium model, nominal wages and price rigidities Hip.: full employment equilibrium model, nominal wages and price rigidities Concludes that the exchange rates can be given up as an adjustment instrument, if shocks are symmetric or if there are adjustment mechanisms to deal with asymmetric shocks Concludes that the exchange rates can be given up as an adjustment instrument, if shocks are symmetric or if there are adjustment mechanisms to deal with asymmetric shocks

6. 6 OPC and Intra –Industrial Trade Frankel and Rose (1998) Frankel and Rose (1998) Satisfaction of OCA criteria is endogenous to shifts in the economic policy regime Satisfaction of OCA criteria is endogenous to shifts in the economic policy regime Similarity of shocks and cycles depend on the extent of intra-industrial trade Similarity of shocks and cycles depend on the extent of intra-industrial trade Elimination of exchange rates risks and less transaction costs increase trade Elimination of exchange rates risks and less transaction costs increase trade EX POST more than ex ante

7. 7 Economic integration and macroeconomic fluctuations Economic integration will result in less symmetric shocks (de Grauwe and Vanhaverberke, 1993) Economic integration will result in less symmetric shocks (de Grauwe and Vanhaverberke, 1993) The degree of asymmetry will not be affected (Forni and Reichlin, 1997) The degree of asymmetry will not be affected (Forni and Reichlin, 1997) Will result in more asymmetric shocks (Frankel and Rose,1998; Clark and van Wincoop, 1999) Will result in more asymmetric shocks (Frankel and Rose,1998; Clark and van Wincoop, 1999)

8. 8 Occurence of asymmetric shocks Shocks inducing economic adjustments depend on their impact on productivity, terms of trade, wages and knowledge and technological spillovers Shocks inducing economic adjustments depend on their impact on productivity, terms of trade, wages and knowledge and technological spillovers Differences in industrial structure may expose member states to different sectoral price, demand developments and sectoral competition Differences in industrial structure may expose member states to different sectoral price, demand developments and sectoral competition

9. 9 Macroeconomic facts (Demyanyk and Volosovych,2005) The more volatile a country GDP is, other things equal, the more the country will benefit from joining The more volatile a country GDP is, other things equal, the more the country will benefit from joining Growth rate for the 10 new countries was 3,6% per year vs. 3,0% for older (1994-2001) Growth rate for the 10 new countries was 3,6% per year vs. 3,0% for older (1994-2001) Variability of growth rates three times higher Variability of growth rates three times higher Greater consumption asymmetry for the newer EU member countries Greater consumption asymmetry for the newer EU member countries Largers gains from syncronization Largers gains from syncronization

10. 10 GDP Asymmetry

11. 11 GDP Asymmetry Asymmetry Cyprus1,06 Czech Republic2,97 Estonia7,8 Hungary0,87 Latvia6,97 Lithuania18,55 Malta0,49 Poland1,24 Slovak Republic3,18 Slovenia0,96 Mean4,41

12. 12 Austria0,06 Belgium0,16 Denmark0,31 Finland1,07 France0,17 Germany0,08 Greece0,53 Ireland1,66 Italy0,12 Luxembourg2,5 Netherlands0,26 Portugal0,22 Spain0,24 Sweden0,17 UK0,18 Mean0,51

13. 13 Linkage betwen trade and currency Real interest rates seem to be correlated to trade with a significant and negative coefficient over the last 25 years Real interest rates seem to be correlated to trade with a significant and negative coefficient over the last 25 years

14. 14 Linkage betwen trade and currency Eliminated exchange rate volatility (?) Eliminated exchange rate volatility (?) Eradicated currency transaction costs Eradicated currency transaction costs

15. 15 Traditional wisdom Currency appreciation will lead to less exports and domestic goods become more expensive abroad Currency appreciation will lead to less exports and domestic goods become more expensive abroad but but Variations in exchange rates are often accompanied by changes in macroeconomic factors that can have counterbalancing effects Variations in exchange rates are often accompanied by changes in macroeconomic factors that can have counterbalancing effects

16. 16 Getting rid of the exchange rate instabilities will increase full economic integration and intraindustrial trade Getting rid of the exchange rate instabilities will increase full economic integration and intraindustrial trade Strong positive relationship between the degree of bilateral trade intensity and the correlation of business cycles (Frankel and Rose,1997) Strong positive relationship between the degree of bilateral trade intensity and the correlation of business cycles (Frankel and Rose,1997)

17. 17 Firm level data Bernard and Jensen (2004) Bernard and Jensen (2004) Eaton, Kortum and Kramarz (2004) Eaton, Kortum and Kramarz (2004) A larger portion of trade fluctuations seems to came from the entry (exit) of new firms in the export business

18. 18 SMEs and less exchange rate volatility SMEs that did not have the means of prptecing themselves on financial markets SMEs that did not have the means of prptecing themselves on financial markets will start exporting, will start exporting, Thus acounting for the sudden increase in trade following the adoption of a common currency Thus acounting for the sudden increase in trade following the adoption of a common currency

19. 19 Higher sales per exporting firms Higher sales per exporting firms Higher number of exporting firms Higher number of exporting firms Exchange rates affect more SMEs than large firms Exchange rates affect more SMEs than large firms Empirical distribution of firms is heavily skewed towards small firms Empirical distribution of firms is heavily skewed towards small firms

20. 20 Firm heterogeneity and fixed trade costs Endogenously determines aggregate productivity price, output and the number of firms able to engage in trade Endogenously determines aggregate productivity price, output and the number of firms able to engage in trade Outsourcing (logistics, production, product adaptation, offices abroad,…) increase with less interest rate variability Outsourcing (logistics, production, product adaptation, offices abroad,…) increase with less interest rate variability

21. 21 Decrease and convergence in interest rates From 1996 From 1996 A product of the convergence criteria for the Euro A product of the convergence criteria for the Euro A product of the transfer to ECB, with less temptation to use monetary policy to favour short term growth for political reasons A product of the transfer to ECB, with less temptation to use monetary policy to favour short term growth for political reasons

22. 22 Trade effect of adopting euro short lasting Trade effect of adopting euro short lasting

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