11

Euro : Euro :

Effects on Effects on SMEsSMEs

Profª Margarida ProençaProfª Margarida Proença

School of Economics and Management, School of Economics and Management, DeanDean

University of MinhoUniversity of Minho

22

““The Euro and the Democracy”The Euro and the Democracy”

New Bulgarian UniversityNew Bulgarian University

20-21 October, 200620-21 October, 2006

Atelier “I Mediterranei”Atelier “I Mediterranei”

33

European monetary European monetary integrationintegration 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, 1998Hein and Truger,2005;Frankel and Rose, 1999;Goodhart, 1998

Ex postEx post

44

EffectsEffects

Institutional changes:Institutional changes:

€ Elimination of exchange ratesElimination of exchange rates€ Independent central bank conducing Independent central bank conducing

monetary policymonetary policy€ Regulations for fiscal policiesRegulations for fiscal policies€ Labour market and wage setting institutionsLabour market and wage setting institutions

Real convergence and prosperity?

55

Optimal currency Optimal currency AreasAreas Mundell (1961)Mundell (1961) Determine the optimum scope of an economic Determine the optimum scope of an economic

area with fixed exchange rates and common area with fixed exchange rates and common monetary policymonetary policy

Hip.: full employment equilibrium model, nominal Hip.: full employment equilibrium model, nominal wages and price rigiditieswages and price rigidities

Concludes that the exchange rates can be given Concludes that the exchange rates can be given up as an adjustment instrument, if shocks are up as an adjustment instrument, if shocks are symmetric or if there are adjustment mechanisms symmetric or if there are adjustment mechanisms to deal with asymmetric shocksto deal with asymmetric shocks

66

OPC and Intra –OPC and Intra –Industrial TradeIndustrial Trade Frankel and Rose (1998)Frankel and Rose (1998) Satisfaction of OCA criteria is Satisfaction of OCA criteria is

endogenous to shifts in the economic endogenous to shifts in the economic policy regimepolicy regime

Similarity of shocks and cycles depend Similarity of shocks and cycles depend on the extent of intra-industrial tradeon the extent of intra-industrial trade

Elimination of exchange rates risks Elimination of exchange rates risks and less transaction costs increase and less transaction costs increase tradetrade EXEX POST more than ex antePOST more than ex ante

77

Economic integration and Economic integration and macroeconomic macroeconomic fluctuationsfluctuations Economic integration will result in Economic integration will result in

less symmetric shocks (de Grauwe less symmetric shocks (de Grauwe and Vanhaverberke, 1993)and Vanhaverberke, 1993)

The degree of asymmetry will not be The degree of asymmetry will not be affected (Forni and Reichlin, 1997)affected (Forni and Reichlin, 1997)

Will result in more asymmetric Will result in more asymmetric shocks (Frankel and Rose,1998; shocks (Frankel and Rose,1998; Clark and van Wincoop, 1999)Clark and van Wincoop, 1999)

88

Occurence of Occurence of asymmetric shocksasymmetric shocks Shocks inducing economic adjustments Shocks inducing economic adjustments

depend on their impact on depend on their impact on productivity, terms of trade , wages productivity, terms of trade , wages and knowledge and technological and knowledge and technological spilloversspillovers

Differences in industrial structure may Differences in industrial structure may expose member states to different expose member states to different sectoral price , demand developments sectoral price , demand developments and sectoral competitionand sectoral competition

99

Macroeconomic factsMacroeconomic facts (Demyanyk and (Demyanyk and

Volosovych,2005)Volosovych,2005)

The more volatile a country GDP is , other The more volatile a country GDP is , other things equal, the more the country will things equal, the more the country will benefit from joining benefit from joining

Growth rate for the 10 new countries was Growth rate for the 10 new countries was 3,6% per year vs. 3,0% for older (1994-3,6% per year vs. 3,0% for older (1994-2001) 2001)

Variability of growth rates three times higherVariability of growth rates three times higher Greater consumption asymmetry for the Greater consumption asymmetry for the

newer EU member countriesnewer EU member countries Largers gains from syncronizationLargers gains from syncronization

1010

GDP AsymmetryGDP Asymmetry

0

10

20

30

40

50

60

70

80

Asymmetry

Variance

1111

GDP AsymmetryGDP Asymmetry

  Asymmetry

Cyprus 1,06

Czech Republic 2,97

Estonia 7,8

Hungary 0,87

Latvia 6,97

Lithuania 18,55

Malta 0,49

Poland 1,24

Slovak Republic 3,18

Slovenia 0,96

Mean 4,41

1212

Austria 0,06

Belgium 0,16

Denmark 0,31

Finland 1,07

France 0,17

Germany 0,08

Greece 0,53

Ireland 1,66

Italy 0,12

Luxembourg 2,5

Netherlands 0,26

Portugal 0,22

Spain 0,24

Sweden 0,17

UK 0,18

Mean 0,51

1313

Linkage betwen trade Linkage betwen trade and currencyand currency Real interest rates seem to be Real interest rates seem to be

correlated to trade with a correlated to trade with a significant and negative significant and negative coefficient over the last 25 yearscoefficient over the last 25 years

1414

Linkage betwen trade Linkage betwen trade and currencyand currency Eliminated exchange rate Eliminated exchange rate

volatility (?)volatility (?) Eradicated currency transaction Eradicated currency transaction

costscosts

1515

Traditional wisdomTraditional wisdom

Currency appreciation will lead to less Currency appreciation will lead to less exports and domestic goods become exports and domestic goods become more expensive abroadmore expensive abroad

butbut

Variations in exchange rates are often Variations in exchange rates are often accompanied by changes in accompanied by changes in macroeconomic factors that can have macroeconomic factors that can have counterbalancing effectscounterbalancing effects

1616

Getting rid of the exchange rate Getting rid of the exchange rate instabilities will increase full economic instabilities will increase full economic integration and intraindustrial trade integration and intraindustrial trade

Strong positive relationship between Strong positive relationship between the degree of bilateral trade intensity the degree of bilateral trade intensity and the correlation of business cycles and the correlation of business cycles (Frankel and Rose,1997)(Frankel and Rose,1997)

1717

Firm level dataFirm 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 A larger portion of trade fluctuations seems to came from the entry seems to came from the entry (exit) of new firms in the export (exit) of new firms in the export businessbusiness

1818

SMEs and less SMEs and less exchange rate exchange rate volatilityvolatility SMEs that did not have the means SMEs that did not have the means

of prptecing themselves on of prptecing themselves on financial marketsfinancial markets

will start exporting ,will start exporting ,

Thus acounting for the sudden Thus acounting for the sudden increase in trade following the increase in trade following the adoption of a common currencyadoption of a common currency

1919

Higher sales per exporting firmsHigher sales per exporting firms Higher number of exporting firmsHigher number of exporting firms

Exchange rates affect more SMEs Exchange rates affect more SMEs than large firmsthan large firms

Empirical distribution of firms is Empirical distribution of firms is heavily skewed towards small firmsheavily skewed towards small firms

2020

Firm heterogeneity Firm heterogeneity and fixed trade costsand fixed trade costs Endogenously determines Endogenously determines

aggregate productivity price, aggregate productivity price, output and the number of firms output and the number of firms able to engage in tradeable to engage in trade

Outsourcing (logistics, production, Outsourcing (logistics, production, product adaptation, offices product adaptation, offices abroad,…) increase with less abroad,…) increase with less interest rate variabilityinterest rate variability

2121

Decrease and Decrease and convergence in interest convergence in interest ratesrates From 1996From 1996 A product of the convergence A product of the convergence

criteria for the Eurocriteria for the Euro A product of the transfer to ECB, A product of the transfer to ECB,

with less temptation to use with less temptation to use monetary policy to favour short monetary policy to favour short term growth for political reasonsterm growth for political reasons

2222

Trade effect of adopting euro Trade effect of adopting euro short lastingshort lasting

2323