EMU effect on Trade: What’s in it for the UK?

In this paper we estimate the early effect of the European Monetary Union (EMU) on trade and its possible effects on the UK. We use a panel data set that includes the most recent information on bilateral trade for 22 developed countries from 1992 through 2001. After 1999, 12 European countries formally entered into a currency union. Controlling for a host of other factors, we find that a pair of countries that joined the EMU experiences an increase in trade around 14 percent. Furthermore, we found that EMU increases trade not only among members, but also with non-members. Focusing on the UK, our results suggest that if Britain had joined the EMU its trade would have been 7 percent larger in 2001, an additional 15 billion US dollars of 1995.