Britannia Radio

TELEGRAPH      8.12.08
Euro membership does not boost trade
The case for joining the euro has been dealt a blow – with a study 
finding that membership has not boosted trade by as much as was 
claimed by its proponents.

    By Edmund Conway Economics Editor


The long-held view that euro membership would as much as triple the 
trade in goods between its members has been demolished by a new paper 
from one of the US's leading economists.

It comes amid growing speculation that the Government may be quietly 
considering joining the single currency in the coming years as the UK 
recovers from the effects of the financial crisis.

One of the most important pieces of research used by euro proponents 
was a paper from Andrew Rose showing that countries which joined 
currency unions tended to see their trade increase by up to 200pc. 
However, a paper published by Harvard's Jeffrey Frankel has shown 
that, in fact, trade within the eurozone increased by just 10-20pc 
during the first four years of the currency. Moreover, the volume of 
trade did not rise any further thereafter.

In the paper, published by the National Bureau for Economic Research, 
Prof Frankel says: "The most surprising finding of this study was the 
absence of any evidence that the effects of the euro on bilateral 
trade have continued to rise during the second half of the eight-year 
history of the euro."

The paper underlines the question marks that still remain over 
whether euro membership would significantly boost the UK economy. A 
growing number of politicians and economists have argued that Britain 
should reconsider its refusal to join the euro, in the light of the 
pound's dramatic fall over the past year. European Commission Jose 
Manuel Barroso has claimed that Britain is "closer than ever" to 
joining, and despite Downing Street's insistence that there are "no 
plans" for membership, some cabinet members, including Lord 
Mandelson, are known to be behind such a plan. Some suspect entry 
procedures could commence imminently if Labour won the next election.

The prospective benefits to trade of euro membership were one of the 
chief attractions highlighted by a number of papers published by the 
Treasury in the run up to Gordon Brown's five tests in 2003. However, 
Prof Frankel's research shows that the promise proved somewhat 
greater than the reality