”The yes-campaign has misinterpreted its trade guru”
By Bo Malmberg
(The article was published as an op-ed piece (DN Debatt) in the Swedish daily morning paper Dagens Nyheter (www.dn.se), Saturday 2003-08-02)
That conclusion is based on research initiated by Berkeley-economist Andrew K. Rose. Rose has studied how membership of a monetary union affects the trade of nations being members. According to Rose trade can increase by as much as 300 % for countries that form a monetary union.
is that the examples studied by Rose are hardly relevant when one tries to
asses possible effects on
instead looks at trade flows between countries that are of similar size to
The conclusion that can thus be drawn is that it is not credible to rely on Roses research when one argues that membership in the euro-zone will boost Swedish trade and thereby become a vehicle for more job-creation. One of the most important lines of reasoning adopted by the yes-campaign can thus be refuted.
The shallowness of the empirical results that the yes-campaign relies on can be detected simply by studying the database that Rose himself has constructed and which is available on his personal website. In that database there are data on all in all 40 000 trade flows of which around 400 pertain to countries having the same currency.
When Rose quantifies the effect of being member of a monetary union he compares the actual trade flows between two countries with the expected trade flows after taking into consideration the geographical distance between the countries as well as size of GNP. He then draws the conclusion that a common currency can boost trade by as much as 300 %.
One line of critique that has been levelled against Rose, for example by the British Department of Treasury, is that trade flows within currency unions making up that analytical base usually take shape between very small countries. Another deficiency is that monetary unions that form the bulk of the research done by Rose comprise countries that are relatively far way from each other. The average distance is 180 mil and more than half of the member-countries are located more than 100 mil from each other.
It is therefore relevant to pose the question if a monetary union is likely to exert the same positive effects on trade flows over shorter geographical distances.
It is easy to look into this by relying on the database Rose himself has provided. The only analytical step that needs to be done is to make separate analysis between actual and expected trade flows for large and for small countries. Furthermore one has to look separately into the trade that occurs within monetary unions where the geographical distances are large and trade taking place within monetary unions characterized by small geographical distances.
transpires that the positive effects from forming a monetary union mostly
materialize for trade flows over large distances and for trade involving small
nations. For trade that takes place over shorter distances and between countries
of the same size as
not necessarily mean that trade would decrease if
The literature on economic geography can explain how it comes that the effects of monetary unions are different depending on whether member countries are big or small and whether they geographically are close or far away from one another. This literature demonstrates that large trade flows on the whole tend to be less sensitive to higher transactions costs. Transaction costs are costs associated with, i.e., finding a supplier, draw up contracts and secure means of payment. For smaller business deals people however tend to want to avoid high transaction costs. The higher transaction costs that come with the use of multiple currencies are thus more burdensome on relatively minuscule trade between small nations geographically far away from each other. The existence of different currencies is less of an obstacle for countries with geographical proximity where trade flows are large.
The reason why Rose has been able to detect such large effect on trade from a monetary union lies in the fact that his research has been heavily focused on trade flows over large geographical distances between comparatively small nations. Such trade flows start from a very low level, which is one reason why they respond very positively to the lowering of transaction costs. The fact that such flows also tend to be small in absolute numbers means that the effects measured as increase in percentage become very large. This visual effect remains the case even when increase in volume of trade is not very large.
politicians often refer to such rankings as a reliable indicator of successful
economic policy. If one uses such an argument one should admit that
In the future we will be able to make more reliable assessments of the economic effects of EMU. We will have access to robust studies on the relation between EMU and trade. Such studies are being produced but have not yet been published. Nevertheless they are often referred to by campaign makers.
Here one would wish that the Swedish debate would have been characterized by the same reflective attitude as the British Department of Treasury. To quote “Such estimates are surrounded by a number of insecurities and risks. It is of vital importance to bear that in mind when one tries to asses the effects on trade, such an assessment being part of a wider assessment of the likely costs and benefits of a British EMU-membership.”
That such insecurities are significant has been confirmed to me when I was in contact with the author of one of the publications that representatives of the yes-campaign refer to. The author acknowledges that the report contains parts that are not scientifically satisfactory. He is therefore in the process of working on a new up-graded version. But that report is not yet published.
Now that is can safely be said that the proposition that membership in a monetary union boosts trade neither applies to Sweden nor the EMU-area at large, it is time for Göran Persson and others who campaign for a yes to ponder their way of arguing.
Especially Göran Persson ought to give serious consideration how large a weight to assign this trade-related argument. There are reasons to believe that the excessive focus on this aspect has meant that the social democratic yes-campaign has become more detached from classical social democratic economic policy.
With the euro trade will increase, larger markets provide more jobs and more jobs mean higher tax revenues to finance public sector expenditures. This is a summary of the arguments that prime minister Göran Persson uses in the brochure “My reasons for saying yes to the euro” (“Mina skäl att rösta ja till euron”)
What is puzzling here is that Persson seems to subscribe to a narrow-focused and rather outdated analysis of the relationship between economic growth and the well-being of society. According to this attitude the male dominated export companies are the engines of wealth creation. The public sector is treated as a cost. Investments in education, health care and other related – mostly female dominated - activities are not considered.
If one compares this with last years campaign for the general elections when Persson was very explicit in his endorsement of the public sector as the key vehicle for wealth and Swedish competitiveness, one can notice a shift of emphasize. Might this be a reason why it has been so difficult for Göran Persson to make euro membership seem attractive to female voters as well as social democratic rank and file?
Göran Persson admits that his positive attitude towards euro membership has been influenced by the economist Assar Lindbeck, associated with The Research Institute of Industrial Economics (Industrins Utredningsinstitut, www.iui.se), which is sponsored by Confederation of Swedish Enterprise. I regard this as reason in itself to scrutinize the argument put forward by Göran Persson that increased trade paves the way to a more robust welfare state.
Assar Lindbeck is hardly someone who has made himself a name as a
strong proponent of the welfare state. In his latest economic research Lindbeck singles out
challenge facing Göran Persson
and others on the yes-side is to make a convincing case how
coming 20 years
important factor that needs to be borne in mind, when one balances the pros and
cons of adopting the euro, is that none of today’s EMU-members has an
age-pyramid that resembles ours. There is therefore a great likelihood that
As I see it
there are therefore compelling reasons why
Our experience during the last 10 years teaches us that with the help of our own currency we have been able to conduct a very successful economic policy. Especially we can see that we have obtained a much wider scope for a well functioning democratic process. This stands in contrast to the 1980s and beginning of the 1990s when the only variables that parliament could decide about were taxes and public expenditures.
K Rose’s argument that the formation of a monetary union would lead to
substantial increases in trade been relevant for