Changes in Export Affinity after the Creation of the EMU
Nadav Halevi
Abstract
The creation of the EMU in 1999 gave its original eleven members additional
advantages for intra-EMU trade, relative to other members of the EU and the
rest of the world. Other things equal, this should have resulted in greater
export affinity within the EMU. This paper constructs export affinity indices
for the intra-regional exports of the EMU for 1997, a full year before the
EMU, and for 2007,and for its exports to the then other members of the EU,
and to the countries that joined the EU during this period. These are used to
see whether the net effect on export affinity are as expected, or whether
other forces affecting the growth and direction of world exports led to
different results. It was found that though there was clear export affinity
within the EMU in both years examined, and, of course, tremendous growth
in total exports to all regions, export affinity fell rather than rose between
the two years. As far as special affinity is concerned, the growth of world
exports cancelled the advantages both of EMU membership and of new
membership in the EU. Similar results were found for bi-lateral export
affinity indices of the original EMU members.
1
Changes in Export Affinity after the Creation of the EMU
Introduction
By 1999, the measures taken to create an economically integrated
Europe, measures dominated by reductions and elimination of tariffs
and other barriers to trade, had indeed resulted in the creation of a
strong economic region and tremendous growth of trade. In 1999, an
additional step was taken when eleven EU countries joined to create a
currency area, the EMU. Trade theory has long argued the attributes
necessary to make a successful currency area.1 Recent events have again
raised the question of whether a single currency can function well
without very wide integration of other policy instruments, particularly
fiscal measures.
However, there is no disagreement about the expected trade effects
of a currency area: The reduction of transaction costs and risks of
exchange rate changes should, other things being equal, lead to more
intra-regional trade.2 Numerous gravity models have attempted to
measure the trade effects of currency area in general and the EMU in
particular.3 They try to assign these effects to various variables, some
quantitative, such as economic size and economic distance, and some
qualitative, such as membership in a trade agreement and in a currency
area.
This paper takes a simpler approach: it examines exports of the EMU
and its member countries in 1997, a full year before these countries
joined the EMU, and ten years later, to see what changes took place in
export affinities.4 Export affinity indices were constructed for exports
within the EMU and between it and two control groups, the group of EU
countries which did not join the EMU in 1999 (hereafter referred to as
OEU), and the group of European countries (mainly former Communist)
1
Mundell's seminal paper (1961) stressed balance of payment effects. Later stress was placed on
trace intensity and business cycle coordination; e.g., Frankel and Rose (1999).
2
Rose and van Wincoop (2001) concluded that the trade benefits of a currency area outweigh any
negative effects of a common monetary policy.
3
See, for example. Micco, Stein and Ordonez (2003), where numerous studies are surveyed. Glick and
Rose (2015) conclude that estimates are unreliable since they differ greatly depending on the
methodology used.
4
2007 is chosen rather than 2008 because of the financial crisis in 2008.
2
that joined the EU between 1997 and 2007 (hereafter referred to as
EUA). Table 1 lists the countries included in this study.5
Of course, during the ten years between 1997 and 2007 there were
many other developments that affected the structure, composition and
direction of exports. Among these are differences in the rates of
economic development of various countries; e.g., the growing economic
importance of China and India; changes in technology, costs, prices and
trade policies. A major factor affecting EMU trade during this period was
the enlargement of the EU. This paper is not an econometric study,
trying to ascribe to each variable its role in affecting changes in export
affinity of regions. Rather, it compares these affinities in two periods, to
see if the net effects conform to what the creation of the EMU would
lead us to expect. The data used for constructing the various indices
used for indicating export affinity are all taken from the export data of
the IMF's Direction of Trade Statistical Yearbooks, 2004 and 2008.
Export Affinities of the EMU
The simplest way of seeing whether there is special export affinity
within a region or between regions is by computing export
concentration indices. This is done by taking the ratio of a region's
internal exports to its total exports, dividing it by the ratio of world
exports to the region to total world exports, and multiplying by 100. An
index of 100, showing no difference in the trade ratios, would indicate
no special export affinity within the region, that is, no different than the
world a whole. Similarly, an index larger than 100 would indicate some
positive export affinity, and an index below 100 would indicate some
negative affinity. Such indices are purely ordinal: a higher index shows
greater affinity, but not by how much.
Panel A of table 2 presents export concentration indices (ECIs) for the
original EMU group with the region itself, and for the EMU with the OEU,
with the EU as a whole, and with the EUA. Indices are shown for 1997, a
full year before the creation of the EMU, and for 2007. (Not quite a full
decade later, but prior to the financial troubles of 2008).
5
The published trade statistics of many countries did not show separate listing of exports to Belgium
and to Luxembourg till the 1980s; they often were combined. Consequently, the data of these two
countries are here combined, and assigned to Belux..
3
These indices show that before the creation of the EMU, the group
soon to form the original EMU, all of which were EU members, had, as
expected, clear export affinity within the region and with the then
members of the EU and even with the relevant future members of the
EU. In fact there was practically no difference between the indices for
the various groups. It is somewhat surprising that the affinity of the EMU
with the group of later EU additions was not weaker than with the then
EU group.6
Ten years later all the indices are a bit lower, but all still show clear
export affinity. Only the affinity of the EMU with the other earlier EU
members seems significantly lower.
Although the founders of the EU had visions of some kind of United
States of Europe, the EU is still a grouping of independent countries, as is
the EMU. There is a significant difference between a group pf countries
and a single country in trade statistics. Thus, whereas trade between the
50 states comprising the USA is not included in international trade
statistics, intra-EMU (and intra-EU) trade is. In fact, exports between
countries of the EMU are a significant fraction of total world exports:
some 30 percent in 1997. Because, there is strong export affinity within
the EMU, as indicated by the ECIs, these indices undervalue the level of
the export affinity.
In view of this downward bias, a more accurate index to indicate
export affinity is one that compares the region's export ratio not to the
exports of the entire world, but to those of the rest of the world (ROW);
i.e., excluding the regional exports from total world exports. Such export
affinity indices (EAIs) are presented in Panel B of Table 2. They show that
the EAIs are much higher than the ECIs, indicating even a higher level of
export affinity between the EMU with itself and with the two control
groups in both 1997 and 2007.
Furthermore, using EAIs shows that the decline in export affinity of
the EMU with all but the added EU members is more pronounced,
especially with the OEU and consequently, with the TEU. There is
virtually no difference between 2007 and 1997 in the export affinity of
the EMU with EUA. Thus, whatever factors explain the decline in the
6
Bressiere, Fidermuc and Schnatz (2008) conclude that the trade of the EUA countries was fairly
integrated in the EU prior to their joining.
4
intra-EMU EAI did not affect the EUA sufficiently to overcome,
presumably, the positive effect of this group's joining the EU.
Some insight regarding the factors causing the declines in the EAIs can
be gained by examining the growth in nominal exports and,
consequently, changes in export shares between the two periods.
Relevant data are presented in Table 3. The changes in EMU exports are
shown in Panel A. The increase in nominal total exports from 1997 to
2007 was of course tremendous, but not the same to the various
regions: Contrary to expectations, exports to the EMU itself increased a
bit less than total exports. There was a very large relative decrease in
exports to the OEU, which resulted in a relative decline in exports to the
TEU. However, there was a shift of EMU exports to the new members of
the EU; this export growth was much higher than that of total EMU
exports. The attraction of exports to the new EU members, certainly at
least partly from membership itself, outweighed any advantages given
by EMU membership.7
These differences in export growth are reflected in the export shares
for 2007: That of the intra-EMU fell just a bit, whereas it would be
expected to increase; that of the OEU fell by over 28 percent, and that of
the EUA rose by 164 percent.
These export shares of EMU exports form the numerators of the 2007
EAIs; thus, reflecting the role of the EMU itself. The denominators reflect
changes in exports of the ROW. Total nominal exports of ROW increase
some 5 percent more than those of the EMU. This would not affect
export shares if this difference was the same for exports to all regions,
and in that case changes in EAIs would be only because of changes in the
numerators. However, there were wide differences in ROW export
growth: ROW exports to the various members of the EU grew much
more than did total exports: 10.2 percent more to the EMU, 6.7 percent
more to the OEU, consequently 9.4 percent more to the TEU, and 81
percent to the EUA. Questions worthy of special study are what brought
about this tremendous increase in EUA imports, and to the contribution
to this made by EU membership. The differences between ROWs export
7
.Micco, Srein and Ordonrz (op.c.it), in a study for a shorter period, found that the Euro led to great
trade expansion within the EMU and to the rest of the world, but there was little trade diversion. A
different gravity model, Papazogiou, Pontecost and Marques (2006) found considerable trade
diversion.
5
growth to the regions resulted in changes in their shares in ROW
exports: all increased, most strikingly that of EUA.
The combination of increasing shares in ROW exports and falling
shares in EMU exports explain the decreases in the intra-EMU, OEU and
TEU indices. Though the changes in ROW export shares exacerbated the
decreases in the EAIs, the surprising changes in EMU exports themselves
contributed to the lower indices. In the one case where the share in
ROW exports increased as expected, that of EUA, its share in ROW
exports increased virtually by the same amount, resulting in no change
in the EAI
Export Affinities of the Individual EMU Countries
The exports of each of the original EMU countries country was not so
large a fraction of total world exports as to severely bias the simpler
export concentration indices, therefore these indices are computed to
indicate the export affinities of the individual countries. Table 4 presents
the ECIs of each country with the EMU and with the other groups for
1997 and 2007. Whereas values above and below 100 are theoretically
the basis ascribing positive or negative affinity, the inaccuracies of
published bi-lateral export statistics make it advisable to use wider
margins before making such classifications. The arbitrary margin chosen
here is 10 points; consequently, an index over 110 is chosen to indicate
some positive affinity, between 90 and 10 indicates neutrality, and
under 90 indicates negative bias.
In 1997, all but Finland of the original EMU members had ECIs with
EMU ranging from 145 to 233, thus clearly indicating positive export
affinity. Even Finland, with an index of 108, falls in the neutral area
because of the margin chosen. With the OEU, only Austria had negative
export affinity; the others show positive affinity. All had positive affinity
with the TEU. There were wide differences in the indices with the EUA:
Belux, Ireland and Portugal had negative bias and Netherlands and Spain
were in the neutral area.
One would expect that creating a currency area would have increased
the intra-union affinities of its members. Comparison of the ECIs for
2007 with those of 1997, as shown in Table 4, indicates that this was not
the case: The indices for 2007 differ little from those of 1997; in most
cases they are even a bit lower. However, the ECIs of the individual
6
countries with the OEU markedly declined for every country; the net
effect of added discrimination against the OEU is as expected. As to the
EUA group, there were two contradictory influences: the EMU
advantage should have encouraged shifting trade from this group to the
EMU whereas the newly acquired EU advantages should have effected
exports in the reverse direction. The net results are indeed mixed: For
Austria, Finland and Netherlands the ECI rose significantly; for Germany
and Italy they fell, and for others the changes were minor.
Trade theory does not require that all countries within an economic
region have strong bi-lateral trade relations with each of the other
members of the region: surely no one would expect that each of the 50
states making up the USA have positive export affinity with each of the
other 49. Many of the variables affecting bi-lateral trade that are
studied in gravity models, such as economic size, geographic distance
common borders, common language and culture, may be common for
some members of a union and not for others. Potential members of the
EMU, the EU, or for that matter any union, find it to their advantage to
join a union even as a result of strong relations with only particular
members. Tables 5 and 6 present the bi-lateral ECIs of the EZ countries
in 1997 and 2007, respectively, and Table 7 changes in affinity
classification between the two periods. It is not surprising, as seen from
Table 5, that in 1997 Austria and Finland had definite positive export
affinity with only two of the other original EMU countries, and Ireland
and Spain with only four.8 Six countries had negative export affinity with
Ireland and all had positive affinities with Germany.
Because the formation of the EMU did add some discrimination
against the OEUs, and added discrimination against non EU countries,
one would expect at least some increase in bi-lateral export affinities
within the EMU. Comparison of Tables 5 and 6, and Table 7 do not show
any substantive change in shifts from neutral or negative export affinity
to positive affinity. Four countries –Austria, Finland, Portugal and Spain –
still had negative export affinity with four or more of the other EMU
countries.9 The bi-lateral ECIs for 2007 are lower (by at least 5 percent or
more) than those for 1997 in 43 cases, and higher in 27 cases, but there
8
Finland 's strongest trade ties were with the rest of Scandinavia, and Ireland's with the U.K.
Halevi (2915) found similar lack of export affinity among OECD European countries o in 2007,in
exports of both goods nd services.
9
7
were only 15 cases where the differences were enough to change the
classification: negative, neutral or positive export affinity.
For the individual countries, as well as for the EMU as a whole, it is
advisable to separate the two components that make up an index,
numerator and denominator, to see whether the change in an index
from 1997 to 2007 resulted from changes in the EMU member's export
shares or from changes in world export shares. Table 8 presents the
2007/1997 ratios of regional export shares for each country and for the
world as a whole.
The shares of intra-EMU exports of six EMU countries - Austria, Belux,
Germany, Italy, Netherlands and Spain - were lower in 2001 than in
1997. This is contrary to expectations. The share in total word exports of
exports to the EMU was higher by 2.5 percent, thus, exacerbating the
fall in the ECIs. The EMU shares of the other members were a bit higher
in 2007 than in 1997, but not significantly different from those of the
world as a whole; consequently, there was little net change in their ECIs.
The export shares of the OEU fell for all countries of the EMU and by
more than the fall in OEU's share in world exports; thus, the net effect is
as expected. The share of TEU in world exports increased, but fell for
every EMU member; as a result, both factors contributed to falling ECIs.
The EUA group attracted exports from each of the EMU members
and, as expected, its export shares all increased. The EUA's share in
world exports increased less for all but Germany, Italy and Spain; thus,
only Germany and Italy had lower ECIs and Spain's barely changed. EU
expansion seems to have affected the direction of EMU exports of most
EMU members more than EMU membership.
Table 9 presents the changes in bi-lateral export shares and those of
the world as a whole. These can show the influence of each on the
changes in the bi-lateral ECIs. Table 10 summarizes the data.
One would expect that EMU membership should increase bi-lateral
export shares. All counties had mixed results, and for all but two
countries, Ireland and Italy, the number of decreasing export shares was
greater than those increasing. Of the 90 bi-lateral export shares, 50 were
lower in 2007 than in 1997, and 40 were higher. Only the latter cases
can be credited for contributing to a rise in bi-lateral export affinity.
Even where export shares rose, their effect on the ECI would be
cancelled if the world's rose more. In 13, about one third of the cases,
8
the direction of world export growth did in fact do so. Changes in world
exports also affected the ECIs where the bi-lateral trade shares
decreased: in 37 of those 50 cases, world export shares rose or fell less,
thus exacerbating the decline in the bi-lateral ECIs.
In conclusion: while this study does not attempt to measure all the
influences affecting export affinity, it does show that the net effects on
intra-EMU export affinity were not what would be expected from the
creation of a monetary union, neither for the EMU as a whole nor for the
bi-lateral exports of its members.
9
REFERENCE
Brussiere. M., J. Fidermuc and B. Schnatz (2008). "EU Enlargement: Lessons
from a Gravity Model", Review of Develo0pment Economics, Vol. 12
(3), pp. 562-576.
Frankel, J. and J.K. Rose (1999), "The Endogenity of the Optimal Currency
Area Criteria", Economic Journal Vol.10 (449), pp. 1009-1025.
Glick, R. and A.K. Rose (2015), "Currency Unions and Trade: A Post-EMU
Mea Culpa". NBER Working Paper21535.
Halevi, N. (2015), "Export Shares and Relative Export Affinity of Goods and
Services of European OECD Countries, 2007", Global Economy Journal
Vol. 15 (1).
IMF, Direction of Trade Statistics, (2004), Washington, D.C.
Direction of Trade Statistics, (2008), Washington D.C.
Micco, A., E. Stein and G. Ordonez (2003), "The Currency Union Effect on
Trade: Early Evidence from the EMU", Economic Policy Vol. 18 (37),
PP. 315-351.
Mundell, R. A. (1961). "A Theory of Optimum Currency Areas", Amercan
Economic Review Vol.51 (4), pp. 657- 665.
Papazogiou, C., E. J. Pentecost and H. Marques (2006). "A Gravity Model
Forecast of the Potential Trade Effects if EU Enlargement: Lessons from
2004 and Path-dependency In Integration" (2006), The World Economy
Vol.29 (8), pp. 1057-1089.
Rose, A.K. and E. van Wincop (2001). "National Money Area Barriers to
External Trade: The Real Case for a Currency Area" (2001). American
Economic Review Vol. 91 (2), pp. 386-390
10
TABLES
Table 1. List of Countries
Table 2. EMU Export Concentration and Export Affinity Indices
Table 3. Export Shares and Export Growth
Table 4. Regional EAIs of EMU Countries
Table 5.Intra-EMU ECIs, 1997
Table 6. Intra-EMU ECIs, 2007
Table 7. Number of Changes in Direction of Bi-lateral ECIs
Table 8. Effects of Changes in Export Shares
Table 9. Ratio of Export Shares 2007/1997
Table 10. Effects on ECIs of Changes in Direction of Exports
Sources: All computations from export data in IMF Direction of Trade Statistics Yearbooks 2004 and 2008
11
Table 1. List of Countries
Original EMU Members
Other EU 1997
Austria
Belgium
Luxembourg*
Finland
France
Germany
Ireland
Italy
Netherlands
Portugal
Spain
Denmark
Sweden
UK
Added EU by 2007
Bulgaria
Cyprus
Czech Republic
Estonia
Greece
Hungary
Latvia
Lithuania
Malta
Poland
Romania
Slovakia
Slovenia
*Many countries did not show separate data for trade with Belgium and Luxembourg, therefor in study they are combined as
Belux.
12
Table 2. EMU Export Concentration and Export Affinity Indices
A. Export Concentration Indices
Regions
EMU
OEU
TEU
EUA
1997
181
172
179
174
B. Export Affinity Indices
2007
173
140
167
174
1997
280
249
273
256
2007
250
168
231
250
Table 3. Export Shares and E
Export Shares 1997 Ex2007/Ex1997
EMU
Total 100
EMU 49.0
OEU 13.3
TEU 62.3
EUA 5.0
ROW*
100
17.5
5.3
22.8
2.0
2.41
2.37
1.73
2.25
3.41
EMU
ROW
2.54
2.80
2.71
2.78
4.63
100
48.2
9.5
57.7
8.2
Shares 2007 % Change
EMU
ROW
100
19.3
5.7
25.0
3.3
EMU
-1.1
-2.6
-28.6
+16.4
ROW
+4.6
+7.5
+9.6
+16.5
13
Table 4. Regional ECIs of EMU Countries
EMU
1997 2007
Austria 203
Belux 231
Finland 108
France 176
Germany 156
Ireland 145
Italy 162
Netherlands229
Portugal 233
Spain 218
179
223
106
174
150
146
150
215
213
198
OEU
1997 2007
85
16Z
304
167
173
352
140
190
224
140
69
134
245
140
141
292
102
161
104
125
TEU
1997 2007
175
216
151
174
160
191
157
220
228
200
157
205
134
168
148
175
140
204
206
183
EUA
1997 2007
219
81
135
112
259
50
249
108
38
106
281
99
183
120
206
55
220
204
52
102
14
Table 5.Intra-EMU ECIs, 1997
Austria
Over
110
90 110
Belux
Finland
France
Germany *It France*
Germany
Spain*
Italy*
Netherlands* Ireland
Belux*
Germany*
Italy*
Italy
Portugal*
Portugal
Germany
Spain
Netherlands
Spain
Finland
France
Finland
Austria
Netherlands
France
Spain
Germany
Ireland
Italy
Austria*
France*
France*
Belux* Netherlands Spain*
France*
Belux
Germany*
Italy
Germany
Austria*
Spain
Spain
Portugal*
Portugal
Finland
Netherlands
Austria
Under Netherlands
Ireland
Austria
Ireland
Ireland
90
Portugal
Portugal
Finland
Belux
Italy
Ireland
Belux
*Arranged in descending order; asterisks indicate ECIs over 200.
Italy
Belux
Finland
Finland
Portugal
Austria
Netherlands
Ireland
Netherlands Portugal
Spain
Belux*
Spain*
Portugal*
Germany*
France
France*I
France*
Germany*
Italy*
Italy
Belux
Germany
Finland
Finland
Spain
Netherlands
Austria
Italy
Portugal
Italy
Belux
Netherlands
Ireland
Austria
Austria
Finland
ireland
15
Table 6. Intra-EMU ECIs, 2007
Over
110
90 110
Under 90
90
Austria
Belux
Finland
Germany*
France*
Portugal
Italy*
Netherlands* Netherlands
Portugal
Portugal*
Germany
Germany*
Italy
Spain
Spain
Finland
France
Belux
Netherlands
Ireland
Ireland
Finland
Austria
France
Portugal*
Spain*
Belux*
Italy*
Germany
Germany
Austria*
Portugal*
France*
Belux
Italy
Spain
Netherlands
Finland
Ireland
Belux*
Portugal*
Spain
France
Italy
Portugal*
Spain*
France*
Austria*
Germany
Spain
Ireland
Netherlands
Ireland
Netherlands
Germany
Italy
Belux
Belux
France
Italy
Austria
Ireland
Austria
Finland
Finland
Austria
Finland
Ireland
Netherlands
Netherlands
Belux*
Portugal*
Germany*
France
Ireland
Italy
Spain
Portugal
Spain*
France*
German*
Italy
Spain
Portugal*
France*
Italy*
Germany
Belux
Belux
Netherlands Ireland
Netherlands
Finland
Ireland
Austria
Austria
Finland
*In descending order. Asterisks indicate over 200.
16
Table 7. Number of Changes in Direction of Bi-lateral ECIs
Number of Changes
Austria
Bewlux
Finland
France
Germany
Ireland
Italy
Netherlands
Portugal
Spain
Increase
2
2
4
2
2
4
3
3
3
2
Decrease
5
3
4
4
4
4
4
4
5
6
From Negative to
Neutral
From Neutral to
Positive
1
Negative
2
From Positive to
Positive
Negative
Neutral
1
1
2
1
1
1
1
1
1
1
1
17
Table 8. Ratios of Trade Shares: 2007/1997
WORLD
AUSTRIA
BELUX
FINLAND
FRANCE
GERMANY
IRELAND
EMU
102.5
90.1
98.6
101.2
101.3
98.3
103.4
OEU
93.6
75.9
72.0
72.7
78.7
76.2
TEU
100.6
88.7
94.1
88.6
96.7
EUA
162.3
208.1
199.1
221.0
173.8
ITALY
NETHER
PORTUGAL
SPAIN
94.7
96.1
101.6
93.1
73.9
77.3
78.5
44.2
86.9
93.2
91.4
91.8
92.9
89.9
92.2
128.7
178.0
143.8
307.2
222.9
156.3
EXPORTER →
18
Table 9. Ratio of Export Shares 2007/1997
EXPORTER →
IMPORTER
WORLD
AUSTRIA
BELGIUM
FINLAND
FRANCE
GERMANY
IRELAND
ITALY
NETHERLANDS
PORTUGAL
SPAIN
WORLD
AUSTRIA
103.3
98.6
115.6
114.6
93.8
94.5
105.4
99.3
32.2
128.9
83.6
81.7
85.7
85.8
119.1
108.0
66.4
96.6
125.6
BELUX
FINLAND
FRANCE
GERMANY
IRELAND
95.0
74.2
104.2
88.7
95.9
111.5
105.2
90.6
115.1
90.9
143.9
288.1
107.9
74.7
59.8
110.4
95.8
102.8
164.8
96.5
95.0
85.4
118.8
85.4
98.9
43.1
93.8
135.7
63.4
126.0
96.8
116.1
99.3
90.3
90.5
119.9
134.9
91.1
91.7
76.0
133.1
107.4
57.2
112.0
140.1
ITALY
104.1
109.2
106.2
93.8
78.5
129.1
82.5
71.3
142.4
NETHER
PORTUGAL
94.1
111.0
114.5
80.9
92.2
120.5
86.9
133.0
56.3
70.1
87.1
64.3
109.5
104.5
69.3
96.1
118.5
SPAIN
93.2
102.1
107.4
102.3
80.3
135.7
87.0
88.7
95.2
192.2
19
Table 10. Effects on ECIs of Changes in Direction of Export Shares
Direction of Change
Increase
Decrease
World Export Change
Prevented Rise* Added to Fall**
Austria
6
3
1
5
Belux
5
4
2
4
Finland
6
3
1
4
France
6
3
2
4
Germany
5
4
0
3
Ireland
3
6
1
3
Italy
4
5
1
3
Netherlands
5
4
2
4
Portugal
5
4
1
3
Spain
5
4
2
4
*World share rose more than country share.
**Country share fell and world share rose or fell less.
20