The Impact of Exchange Rate Fluctuations on European Community Trade

The impact of exchange rate fluctuations on international trade has long been a major concern for policy makers. This is particularly the case in Europe, where countries trade extensively with each other. The crisis that began in the Summer of 1992 generated increased exchange rate fluctuations and, therefore, renewed concerns about consequences for trade inside the Community. This report has attempted to infer the likely impact of the exchange rate crisis on trade flows inside and outside the Community. The analysis indicates the need to distinguish between short-term oscillations (i.e. volatility) and medium-term fluctuations (i.e. misalignment). We find that the recent ERM crisis is likely to have had some negative impact on trade within the region, but this impact is probably minor in size.