Better out than in? Regional disparity and heterogeneous income effects of the euro

Vol: 
88/2021
Author name: 
Cho S-W
Wong S
Year: 
2021
Month: 
October
Abstract: 

This paper conducts a counterfactual analysis on the effect of adopting the euro on regional income and disparity within Denmark and Sweden. Using the synthetic control method, we find that Danish regions would have experienced small heterogeneous effects from adopting the euro in terms of GDP per capita, while all Swedish regions are better off without the euro with varying magnitudes. Adopting the euro would have decreased regional income disparity in Denmark, while the effect is ambiguous in Sweden due to greater convergence among noncapital regions but further divergence with Stockholm. The lower disparity observed across Danish regions and non-capital Swedish regions as a result of eurozone membership is primarily driven by losses suffered by high-income regions rather than from gains to low-income regions. These results highlight the cost of foregoing stabilisation tools such as an independent monetary policy and a floating exchange rate regime. For Sweden in particular, macroeconomic stability outweighs the potential efficiency gains from a common currency.

Publication file: 

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