The Effects of the European Economic and Monetary Union on International Trade Essay


Up till 2007, there were about 12 countries that were a part of the European Monetary and Economic Union. These countries were namely France, Finland, Belgium, Ireland, Greece, Germany, Netherlands, Portugal, Luxembourg, Italy, Austria and Spain. These twelve countries were amongst the first ones to accept euro as their currency and become a part of the European EMU. There are a number of countries that still have to follow the steps of the above mentioned countries in order to be a part of the EMU, however, in this paper, the case of Slovenia will be discussed which entered first after all the above mentioned countries. Although Cyprus and Malta have also entered the EMU, but the case of Slovenia will enable us to see how the European EMU affects the international trade and how far does it helps developing countries on their way up the ladder of growth and prosperity (Baldwin, 2006).

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            As it is obvious, that every currency has its own identity and every identity has an entire book of history related to the culture, politics, society and the lifestyle of the country in question, however, when all the above countries changed their currency to the world famous Euro, there must have been some benefits and advantages that outweighed other currencies and forced nations to adopt a single powerful currency inside the EU. Apart from taking a historic decision in the history of a country, adapting to the EURO and the EMU also makes these countries eligible to practice their own freedom of making monitory policy in different times of economic condition. A principal cost this huge for a developing country is surely not big enough from the power and charms of Euro if we can see countries still entering the EMU and leaving an open ended question to a couple of developed nations as well that weather they will enter the EMU or are they better staying out. These countries are surely Britain and Denmark.

            One of the most common and obvious benefits of entering into the EMU is that the common currency which is prevailing in the region helps developing countries conduct trade within the EMU, with the same currency throughout and lower cost of transaction due to the same currency. The risk of exchange rate fluctuation is also covered between transactions because within the EMU, ups and downs in the exchange rate do not actually leave much risk for deals to be finalized or to be left in the middle as it is incase with developing countries all over the world.

            Ever since Euro entered the market, there have been tons of researches and empirical studies related to the effects and impact of the euro on international trade and what have been the consequences. However the focus of these studies has been seen to be limited to the extent that the research encompasses the effect of euro on trade of countries inside the EMU and their impact on trade inside the EMU as well. Moreover, past researches also conclude and recommend the effects of different trade unions outside EU on the trade that is being conducted within the member countries of these trade groups. However, this paper will answer several questions by filling the gap into research being done already done before and highlighting the impact of the EMU on international trade of European EMU countries with their trade outside the EMU. Several questions that will be answered by this paper are as follows:

1)      How does a common currency which in this case is the EURO effects and leaves impact on the international Trade all over the world.

2)      Did the velocity of trade increase between the countries in the European Union or in that region after accepting EURO as the standard currency?

3)      How far were EURO accepting countries willing and at the same time able to improve their trade with countries outside the EMU and how far the collusion with EURO helped these countries to mobilize international trade?

4)      Can the effect of the EURO be quantified with respect to the international trade and how far has it been successful for countries that are paying the principal costs of changing their currency altogether.

5)      Which countries or what special activities that are a part of the European EMU benefitted from the concept of single currency.

            This paper looks forward to answer all the questions that have been listed above along with others with literature review and empirical research as well wherever needed to fulfill the purpose of the report.

            The arrangement of information and organization of different sections is such that the paper starts with a brief description of the studies that have been conducted in the past related to effect of one currency before the EMU was actually signed formally along with highlighting the effect that the concept of one currency had on the trade inside the euro zone after the formation of the EMU. In addition to this, literature review to answer all the critical questions enlisted above will actually help the research to take its course towards the empirical econometric research in which the paper will look forward to analyze the case off Slovenia from the time when it was not the member of the EMU and till the time when it forgo its currency identity. The paper will end with a conclusion in which ending statements after literature review findings and the empirical research findings will be made (Berger & Nitsch  2005).

Literature Review
Whenever there is a unification of currency, the economic zone has to face a number of consequences, some of which are favorable and at times some that can’t be forgotten. According to researchers, the basic motive behind the unification of the currency is to achieve economic efficiency by optimum resource allocation steady economic growth, stability of macroeconomic indicators such as inflation GNP and employment functions, and the proportion of distribution of trade between different countries and regions that are ready to become a part of the concept. after all the literature review that has been done for this paper, it was found that as far as theoretical data is concerned, there is only one optimum theory answering the question of the impact of the unification of currency on international and national trade which is the theory of the optimal monitory area. Many researchers believe that keeping in mind the empirical evidences, the theory of optimal monetary area is the only theory that addresses the issues related to unification of the currency.

Before formation of the EMU
As it has been seen in the past that countries tend to enjoy the growth in trade by fixing the exchange rate and elimination of the risk that is related to the fluctuation of the foreign exchange currency, similarly, one of the most common benefits of unification of the currency is that countries wanted to hedge the risk of fluctuation of the exchange rate due to high volatility in the region as there had been a mix of both developed and developing countries trading amongst themselves. Therefore, all the researchers are united on the simple fact that before signing the EMU, all the countries that became a part of this unification of the currency wanted to reduce the risk due to volatility and instability of the prevailing exchange rate system. Subsequently, in 1970, when the System of Brettenwood collapsed, a number of researches started to unearth their findings regarding the impact of exchange rate on the international trade. The scope of such researches varied but were limited to the effects and impacts of exchange rate on the international trade whether in the case of floating exchange rate or fixed exchange rate.

            It is evident from the resources available that studies that researched on the relationship between exchange rate and trade were not able to identify any significant finding until 1990. These results as quoted by Cote (1994) seemed to a quite heterogeneous as far as his review of researches from 1988-1993 is concerned. As it was observed from the literature review that there was a diverse pool of analysis and criticism on theories and impacts, many of the researches bottle down to the conclusion that there is a negative relationship between the exchange rate or exchange rate volatility and the flow of trade. For example, it has been clearly stated in the recent study conducted by Baun and Cagalyn (2007) that the relationship between exchange rates and the international trade has always been fuzzy in the past history and difficult to understand (Breedon 2004).

            In addition to the fizzy relationship, Andrew Rose also presented a study in which he analyzed the impact on the international trade of single currency regional unions. This study was published in Economic Policy 2000 and opened doors to a new discussion with respect to international trade. Now all the studies that were presented before Andrew held a standard assumption all throughout. This is the same assumption with which this very paper started as well to introduce the topic as well. The assumption that the impact of currency unions on international trade is the same as eliminating the exchange rate volatility from exchange rate fluctuations. This means, that by eliminating the risk factor from floating exchange rates, the two models could be equated that are the currency unions and risk free exchange rates. Andrew was the researcher who introduced the popular gravity model to libraries and journals in which he propagated the inclusion of another element in calculation of exchange rate impact on trade that is the (CU) currency union membership. As this model was new before the formation of the EMU, Andrew is known to be the pioneer and introducer of this new phenomenon which is widely known as the ROSE effect. According to Andrews study and the research that he is known for, the impact of common currency on the trade of any new member of the union climbs up to the extent of three times than that of a non-member. As far as the overall trade is concerned which also includes the international trade, the figure that Andrew quotes in his research is around 200 percent which is not only statistically significant, but practically it is an eye opening figure and a reason to believe why countries bare so much costs for getting into the EMU. Also, he maintains that there is no diversion of trade as such which can be spotted by members of the trade union from the non-members. Surely there is an exponential increase in the trade that is conducted between the union members due to declined and controlled tariffs, however, the trade with other non-member partners also remains unaffected, in fact, as the power of supply and demand increases; the international trade also increases to a good significant amount as well.

            Apparently the above theory of Andrew actually made strong recommendations and remarks in favor of common currency unions, but, this was strongly criticized by a number o scholars and researchers in times after Andrew. The group of critiques has been categorized in the following three:

·         There are missing variables. The variables that ought to increase the trade in light of currency unions are found to have increased the value of the coefficient invalidly.

·         There is an inverse causality of endrogeniety as previously and most commonly the criterion for currency union membership has always been the large trade flows and not vice versa.

·         Model specification is incorrect in terms of linearity and variables involved.

            Another valid criticism that was witnessed on Andrews work was that many evidences were collected from his research in which comparisons between countries which were very small poor and open to the rest of the world were compared on the basis of currency union and thus the results had been generalized. The critiques believe that all the countries that Andrew used were way too much away in all respects from the regional average and hence the research could not be a representative or generalized for the entire population inside a trade union. However, the conclusion that can be extracted is that the impact of currency or trade union on the international or regional trade might not be as large as Andrew tried to show it to the masses, still, the fact that it was the first time after Andrew published his studies that economists and researchers all over the world realized that the impact of currency union is larger then what they had known for all these years. Up till that time there were no EMUs as such and thus it was difficult to analyze the impact of currency union on the performance of any EMU, however, now that EMUs are available, it is advised to have a sample of countries that is much more homogenous than earlier researches and at the same time is controlled and scientifically correct (Bun & Klasassen 2002).

Empirical Literature Review, After EMU formation
Once the euro was introduced to the researchers and financial markets all over the world in 1999, the difficulty of analyzing the data on real time basis was removed and the due to the availability of sufficient time series after introduction of the Euro, authors and researchers started their work to analyze its effect on trade between and outside the EMUs. It is said that the timing in which euro was introduced was perfect for scholars and researchers and also for the currency unions themselves as the introduction of euro laid the foundations of how monetary links are being laid between the developed countries. The first study after the introduction of euro came out in 2003 by Micco, Stein and Ordonez which confirmed the existence of the Rose effect that was named after the researcher Andrew. The authors analyzed the data under the gravity model that was proposed by Andrew with respect to bilateral trade within and outside unions with the help of the data available for 1992-2002 (De Souza 2002).

            After conducting different regressions on the above data, the authors concluded that indeed the impact of currency union on the trade within the EMU was around 4-16 percent depending on the situation of countries being compared. This was indeed a significant amount of effect on any countries trade and hence supports the arguments and concepts put forth by Andrew to some extent. So much so, the regression also proved the proposition presented by Andrew that the trade and transactions with the non-member countries will not be affected, instead it will also grow was also supported by the regression conducted by authors in 2003. The small sample of developed countries gave results of increase in trade with the non-member of the EMU at around 9%.

            In 2004, another researcher named Faruqee took the research by Micco and associates one step ahead by analyzing the effect of EMU on the international trade in light of country’s individually in order to see what were the factors that generated certain type of effect from each country in the EU. According to his research he pointed out that when the Euro was introduced, the increase in trade within the Europe trade zone went up by 7-14 percent as compared to the international trade with industrial and more developed countries. The research also pointed out that there were certain countries with in the Euro zone that befitted quite a lot from the unification of currency and at the same time there were some countries which were the least effected or the least benefitted from such measures. Spain and Netherlands were the most successful whereas Finland and Portugal were the least benefitted from the introduction of unified currency. Both studies that are the study by Micco and Faruqee agree on the fact that there was no diversion of trade witnessed from region of Europe after the introduction of Euro. Trade increased at both levels that is inter euro zone and internationally as well. International trade was reported to increase overall by around 8% in the early years of introduction and the euorozone started enjoying the benefits of comparative advantage at a number of global ventures, avenues and commodities as far as trade is concerned.

            Flam and Nordstorm have yet been able to provide one the most successful models in which they have tried to avoid most of the criticism on many grounds that later researchers point out in such analytical papers. The report by Falm and Nordstrom was presented in 2006 and according to Baldwin (2006, p38), the most important error that these researchers have eliminated is that of the logarithms in which they concentrated only on the exports rather than taking into account the averages of the sum of exports and imports. The focus was concentrated not on the bilateral trade but the exports of specific countries to see how well exports are performing after the similar currency measures in place (Emerson 1992).

            The empirical findings from the research conducted by Flam and Nordstrom (2006) showed that the effect of euro being a common currency in the euro zone actually started to have an effect on the internal and external trade of countries that were looking for a membership in the EMU. Many companies were actually seen to have hedged their foreign currency reserves for the later part of 1998. A boost was evident and experienced right after the euro was launched in 1999 and the trade between EMU countries increased by 15 percent. According to point estimations by the researchers, an increase of 1.5 percent was seen after reduction of average exchange rate volatility by one standard deviation.

            Along with the trade effect on the members of the EMU, the effect on non-members was also positive and was proved in the study presented by Falm and Nordstrom (2006). The international trade from EMUs to the non members increased in both directions. The export of EMU to international stage increased by 8% and the imports also spotted an increase in 7.5% as the principles of comparative advantage at all levels started to take their effect on the international trade. The growing level if trade between the members of the EMU to both the members and the non-members is argued in much detail in the study presented by Yi (2003). The ideas that Yi floated in his research included increased vertical specialization between countries and that as many products are assembled and manufactured in phases, thus, countries started to specialize in specific phases so as to gain a competitive edge and become a trade partner.

            Another study by de Nardis, De Santi and Vicarelli came up with similar findings as above in their paper published in 2007. According to the international standard industrial classification, the authors studied each country in the euro zone individually and came up with a conclusion that the gravity effect or the rose effect was not the same or present in all industrial sectors. This is one of the reasons why many countries experienced growth in trade to an immense level while others could not benefit. Some of the sectors which showed positive effects and results for countries all over were related to the automotive industry, electronics industry, tobacco, and beverage, production of food and production of metals industry. This growth of trade has been explained by the authors of the study in light of Baldwin’s new good hypothesis in which he states that the fixation of the currency and exchange rate actually reduced the primary and fixed costs that companies had to incur in order to export or enter the new market. This is backed by statistics and figures that the study quotes regarding increase of companies crossing borders and starting operations in other nations in and outside the EMU (Grundey 2007).

            The above table summarizes the literature review and the number of studies that have been done specifically for the purpose of this report. The table shows the samples used, the dependent variables during the study and the estimated results of the impacts of the EMU on the international trade by each of the study.

Slovenia and EMU
At the start of the paper, it was identified that the focus of the paper will shift to a living example of a developing country which witnessed some effects of the formation of the EMU even before entering the European EMU for common currency and then the effects of the influence of the EMU after the country entered the EMU. The country under discussion for this report is Slovenia. The research conclusion that Falm and Nordstrom (2006) reached regarding no diversion of trade due to the formation of EMU and instead the trade with outside members being increased, Baldwin (2006) supports this point in light of Slovenia’s case as the country was amongst those countries that experienced an increase in international trade with the members of the EMU after the EMU was formed and the currency unified. Though Baldwin disagreed with using large samples that Falm and Nordstrom (2006) used in their study as these large samples delivered inflated results, but he maintained that the introduction of the single currency and the EMU positively correlated with the increase of international trade. According to a regression analysis conducted by Baldwin, it was noted that the sample including countries from the European Union only concluded an increase in exports of around 9 percent within the member countries and around 7 percent with the international community (Hsing & Sergi 2009). The reason that Baldwin proposed as discussed in the earlier chapters of the report was the fact that the introduction of Euro as a single currency helped reduced the fixed costs of trade or rather entering the EMU markets which lead to increased exports of both the members and the non-members of the EMU into the Euro-zone. As Baldwin (2006) describes this, this phenomenon is also known as the new good hypothesis.

            Now the above discussion raises a question that sets valid after inferring different studies that have been quoted above, but still needs and empirical and quantitative research to answer the question. The question is that if the introduction of the EMU was itself increasing the international trade of countries without actually being a part of the EMU at the beginning, then why was there any need for countries, for example Slovenia, to join the EMU? The above discussion comes up with a fact that the trade saw no diversion after the introduction of EURO and the EMU. However, at the same time, arguments of scholars and researchers also prove that in this case the benefits of establishing the EMU cannot actually be equated with the benefits of becoming a member of the EMU. In simple words, the level of increase that was actually seen in the exports of countries outside the EMU was larger at the time of establishment of the EMU as compared to the increase when these very countries actually became a member of the EMU. Does this imply that this increase in international trade was just due to a speculative shock of making a powerful EMU for a short period of time or was the growth sustainable? In addition, rather than the exports, the new entrants to the EMU have also witnessed an increase in imports more than exports in the beginning due to their very own EMU members (Slovenjia 2009).

            The entire discussion and a series of rising questions in the last two paragraphs bottle down to the mystery of what had happened in the case of Slovenia as a consequence to the establishment of the EMU in 1999. The question that did the country increased exports and trade at the time of establishment of the EMU or did it benefit from renouncing its own monetary policy and becoming a member of the EMU will be answered in the following discussion.

Over View of trade of Slovenia

            The figure above shows an over view of trade of the country in question, Slovenia, with around twenty four European Union member states. These 24 EU member states have been further classified into the EMU members and the EU members only as well. The data analysis of Slovenia’s major imports and exports and a critical review of the above quarterly figures concluded that the countries that were a member of the EMU were actually those to whom Slovenia was dependent with 80 percents of its trade with the entire European Union. Also, the graphs above show clearly that the exports and imports of the country are on a rise with the EU and the EMU with shorter fluctuating shocks at different quarters visible on the graphs above (Mancini-Griffoli and pauwels (2006).

            More important is the above illustrated figure for a further in-depth analysis of the situation of the country and its trade with the EMU members and non-members. The figure above shows how the import and export figures of the country moved for the Euro-zone in the period 1996-2004. It is also evident that upon inclusion with the European Union, the country’s trade with the EMU and international members also accelerated. In the period when the EURO was introduced, a volatile fluctuation is witnessed if we refer to the graph in the above figure. This rapid fluctuation can be seen in imports along with a surge in the exports of the country in the same quarters. The stagnation in both the imports and imports that can be seen from the period 2000 to 2003 is the period when the country had not actually joined the EU and as soon as the country joined the EU, import and exports figures both can be seen to have jumped vigorously in the early quarters of 2004.

            The figure above is a comparison to the previous figure by showing the index of imports and exports of the country to and from the non-members of the EMU or the EU-12. However, interesting facts can be unearthed after analyzing this figure. This figure suggests that the volatility that was seen in trade of the country at the time when EURO was being introduced is not the same as evident by import and export figure to the international community in this figure.  At the same time we can see that the exports of the country in the same time have increased to the non-EMU members or the international trading partners.

            Following is another important table which will actually show rate of growth in Slovenia’s Import and Export to both the non-members of the EMU and the EMU members in different periods. The period of 2000 – 2003 is the period after introduction of the EMU and the after 2003 is the period when the country actually became a member of the union itself (Persson 2001).

Methodology for Empirical Study
Using a time series analysis, following is a methodology of a robust analysis to see how the imports and exports of the Slovenia to and from the EMU members moved in order to reach a conclusion regarding the impact of the currency union on the international and internal trade the Slovenia experienced before and after becoming a member of the EMU. The variables that have been used for the model are in logarithmic form constant elasticity’s are represented by the coefficients of regression analysis (Mongelli 2002).

            It is a fact that influencing the terms of trade on the international stage is not in the hands of a small and open economy like Slovenia. All the inflows of products are considered to be imports that are demanded by entities in Slovenia and all the outflow of products are considered to be the supplies from the producers in Slovenia. The literature review that has been made available for this report suggests two critical factors that affect the imports of the country. The first factor is the level of economic activity in the country and the second factor is related to the relative prices which derive the demand for more or less imports. Similarly, the exports of the country are also derived by the relative prices of the commodity in the foreign market along with the foreign and external activity in the related product that has to be exported from the country. The export and import function are generally and specifically for this case have been formulated as follows:

EXP: f (Y (f), p(exp)/p(d)); anticipated effect [+, +]

IMP = f (Y(d), p(imp)/p(d)); anticipated effect [+, –]

            It is clear what EXP and IMP imply in the above two equations. The variables Y(d) and Y(F)  represent income from domestic activities of the country and the income from foreign region endeavors respectively. Where p(exp) and p(imp) refer to the prices of exports and imports, p(d) donates the prices of imperfect substitutes of commodities on the domestic level.

            It is expected from the model that the economic activity of the country should be affected by the trade positively by trade whether increases or decreases. As far as the theory is concerned, when export prices increase as compared to the rise of price on the domestic level then the supply of the product to the export market also increases, whereas, when the price of imported products increase which means that they become more expensive, this activity should actually reduce the demand of imported products. The same theory can be applied to the fluctuation of exchange rates which positively effects imports and negatively effects exports when appreciates.

            The regression analysis studied the country’s (real) goods exports to the non-members of the EMU in the euro-zone. The model that tests this segment has taken a form of double logarithm as per the OLS basic assumptions of homoscedacity, autocorrelation and multiollenearity. The export function can be written as follows:

            It can be seen in the above equation that the as an indicator of the foreign demand, the import index of the non-members of the EMU or the 12 members of the EU-zone is donated by IMEZ. The gross amount of fixed capital which increases the exports of Slovenia producers is donated by CFSL. XP marks the relative export prices of products in the foreign market relative to the consumer price index along with two dummy variables for the ending quarters of 1998 before the beginning of the EU currency union (Savrina & Gundey 2008).

            In order to come up with an import model just like an export model in the above case, a number of double logarithms were tested with different variables in light of the relative prices of the import and the domestic economic activity of the product in question. The shortlisted explanatory variables that were tested with double logarithms were Domestic Consumption (DC) and Real Effective Exchange Rate (REERT) of the currency of Slovenia. The model for imports is as follows:

After the regression analysis, the export function was analyzed to be as follows:

            The signs that are placed with the coefficients of the model portray the expected outcomes of the study and the statistically significant results that showed that the explanatory variables that have been used in the model have shown movements to a good extent as far as the exports are concerned in light of logarithms being used. The reason for this is the fact that the variance of 98% on the dependent variable has been explained including the dummy variables. Excluding the dummy variables does not leave much effect on the percentage as it still remains on 96.9. This means that when the import demand of the euro-zone increases by one percent, the percentage increase of Slovenia’s export is recorded to be 0.84 percent where all other factors and variables are held equal. It was also seen that 1% growth in Slovenia’s fixed capital formation in light of the 3 months lag had an overall impact on the exports of the country to around 0.3%. At the same time, the same percentage increase in relative export prices give rise to an increase of 0.42 percent to the country’s exports in 6 months. Even so, the dummy variables that were used in both the import and export models have proved to be quite significant statistically for inferring the results of the model. Because of these dummy variables, the impact on the exports of the country after the introduction of EURO became more evident when the difference between higher exports in the third and fourth quarter of 1998 was of 100%. The increase in exports in the third quarter was recorded at 5.6% whereas in the last quarter the exports were 10.6 percent higher according to the dummy variables.

            The empirical results of the above export model show that effect on Slovenia’s exports show that that the effect lasted for only a short period of time after the introduction of the Euro in 1999. The size of the effect also bolsters the claims that have been made in the literature review of increasing the exports of the EMU non-members to the euro zone.

As far as the imports are concerned, the estimated import function is presented below:

            Similar to the results of the export function, the signs of the explanatory variable coefficients represent the expected results and statistically significant conclusions on the basis of the previous literature review on which the models are based to a great extent. Again in the import sector as well, the movements in percentage of the explanatory variables reveal that explanatory variables are well dependent to the extent of 76% on dependent variables. This means that when consumption on the domestic level increases by 1 percent, the subsequent volume of imports from the EMU countries increases by 1.37 percent. Similarly, when exchange rate appreciates by one percent, the subsequent change or increase in imports is 0.7 all other factors held equal.

            As it a very critical element of the entire was inferred from the dummy variable in the export model, similarly, in the import that same dummy variable has yielded interesting and important results important for the final analysis of the study. According to the dummy variable in the first quarter of 1999, it appeared that the imports of the country fell to around 6.7% even though the euro had just been introduced into the market, however, as far as the entry of Slovenia is concerned to the EMU, a rapid increase of around 11.2% has been witnessed which is not a result of any unusual economic activity or heft exchange rate fluctuations but it can only be defined and supported by the effect of trade due to the country’s membership in the EMU.

            The figures below show the actual value of exports and imports and their regression analysis estimates. After the introduction of the euro, there was some unusual surge and plunge in the second and third quarter of the year 1999 which is assumed to be the effect of implementation of VAT in Slovenia.

            The results of the case of Slovenia lead the report towards a conclusion that as such there were no positive spillover effects after the euro was introduced in EMU on the imports of the country in question. This was also quite expected by the studies and literature already available by Falm and Nordstrom (2006). The study proves that the effect of such measures such as introduction of the EURO was actually short term for the country and there were no long lasting effects of these measures.

The main findings of the research paper expand the scope of study through a detailed literature review that is available on the topic or as a matter of fact on the effect of common currency on trade that is EURO. As it is already mentioned by research work and studies provided already regarding the effect of currency union on trade that there is a strong influence of having a currency union on trade of about 30% provided that the cost incurred are low for switching the currency or hedging the currency in future markets. In addition, the paper also came across a number of empirical studies that reported to have zero or a very insignificant amount of impact of the exchange rate volatility and uncertainty on the international trade. This has leaded this report to separate the two concepts that is exchange rate volatility and the currency union separately as far as the effect of the EMU on the international trade is concerned. It was found that the effect of currency unions proposed structural changes in the formulation of the economy because of the fact that markets do not expect common currencies to be durable in the long run as it is like a fixed exchange rate system which cannot be reversed through changes in monetary policy. According to the researches that have been done in the past, euro seemed to have inconsiderable effect on the international trade. The integration of EU countries was on its way for quite long and that the introduction of Euro was one of the last measures that were implemented as a part of this implementation, therefore, it cannot be generalized that it is the exchange rate which actually helped countries increase their trade within and outside the EMU.

            However, based on this and previous studies, some interesting facts have been UN earthed related to the topic of the report. The fact that the trade inside the euro-zone or within the EMU increased by 10 to 15 % after the introduction of euro as their common currency cannot actually be ignored, however, it has to be noted that this increase in trade was quite rapid and rather than increasing gradually it grew abruptly for the very few members of the currency union. There was actually no effect on the trade of the non-members of the EMU throughout this process and several countries became more exposed and open towards international trade after switching to euro resulting in strengthening of their trade within and outside the EMU. The increase of trade constituted mainly the exports of the non-EMU members to the EMU zone.

            In addition it was also verified that eh introduction of the EURO will increase trade from Slovenia that is the non-members exports to the EMU would increase and as Slovenia was still a non-member was verified. All the trade growth, increase and movement in import and export index as in the case of Slovenia were seen before it actually entered the EU whereas once it entered the EU, rather than experiencing comparatively higher degree of imports, there was a negative impact and in some quarters a constant response to the imports and exports of the country within and outside the EMU. If all that Slovenia experienced before the acceptance of terms of EU was because of the introduction of Euro, then in the coming years all that Slovenia and developing countries will experience will a surge in imports and only a minimum rise in exports if any.

            As far as the case with Slovenia is concerned, the research findings suggest that the introduction of EURO should have also increased the country’s trade which was not yet a member of the EMU was actually authenticated,

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