Title: The euro – benefits and challenges
Headings: The euro – benefits and challenges
The euro – benefits and challenges
Speech by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECBConference “Poland and the EURO” Warsaw, 26 November 2007
1. Introduction
2. Benefits of joining the euro area
3. Challenges related to adoption of the euro
4. Joining the euro area – the formal process
5. Future challenges
European Central Bank
Directorate General Communications

Content: The main benefit of the euro for the individual country, especially for small and open economies, relates to its potential to promote trade. By eliminating exchange rate volatility and providing complete price transparency, the euro has greatly enhanced the forces that lead to economic activity to be conducted across borders. It has been shown in a number of studies [ [ 1]] that trade integration has increased rapidly among countries that have introduced the euro, with a significant increase in intra-euro area trade and foreign direct investment (FDI). Indeed, exports and imports of goods within the euro area rose from about 27% of GDP in 1999 to around 32% in 2006. This rise in cross-border trade may to a certain extent be due to the introduction of the single currency, the increased price and cost transparency it helped foster and the absence of exchange rate risk. The increasing interdependence of euro area countries is also confirmed by the considerable growth in intra-euro area FDI flows, with the sum of inflows and outflows in 2006 accounting for around 5% of euro area GDP – at par with extra-euro area FDI flows. Intra-euro area FDI stocks have thus grown considerably, doubling from 14% of euro area GDP in 1999 to around 28% in 2006. At the same time, the increase in trade with the rest of the world has recently been even greater than the increase in intra-euro area trade, with the following figures showing that the euro area is very open. From 1999 to 2006 extra-euro area exports and imports of goods rose to 33% of euro area GDP, from about 24%. The stronger growth of extra-euro area trade has mainly been due to the more sustained growth in world GDP, an increase in global trade integration and the very sizeable increase in trade with China, emerging Asia and the new EU Member States that joined the Union in May 2004.