The Euro's Effect On Trade Imbalances
When does trade become a one-way relationship? The authors study bilateral trade balances for a sample of 18 European countries over the period from 1948 through 2008. They find that, with the introduction of the euro, trade imbalances among euro area members widened considerably, even after allowing for permanent asymmetries in trade competitiveness within pairs of countries or in the overall trade competitiveness of individual countries. This is consistent with indications that pair-wise trade tends to be more balanced when nominal exchange rates are flexible. Intra-euro area imbalances also seem to have become more persistent with the introduction of the euro, some of which is linked to labor market inflexibility.