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European Integration and the Functioning of Product Markets

European Integration and the Functioning of Product Markets

Edited by Adriaan Dierx, Fabienne Ilzkovitz and Khalid Sekkat

The book reveals that European product market integration has a significant impact on the conditions of competition, the strategies of companies and the structure of industry. It adds a quarter of a percentage to annual GDP growth rates and has not led to an increased exposure of the EU to asymmetric shocks. However, the book argues that further improvements in the functioning of European product markets are needed in order to improve the EU’s growth performance over the next decade. Invaluably, the book provides not only current information about Europe’s achievements in economic integration but also methodology to assess the outcome of economic integration in other regions of the World, such as NAFTA, MERCOSUR and ASEAN.

Chapter 7: The sensitivity of European sectors to exchange rate fluctuations

Michel Fouquin and Khalid Sekkat

Subjects: economics and finance, industrial economics

Extract

7. The sensitivity of European sectors to exchange rate fluctuations* Michel Fouquin and Khalid Sekkat INTRODUCTION The adoption of the euro in 1999 eliminated exchange rate variability between eleven1 European currencies. This is beneficial to intra-European trade because the economic literature has shown that exchange rate variability reduces the volume of trade. The adoption of the euro will not, however, make the European economy immune to all types of exchange rate variability. Indeed, about one-third of European Union (EU) trade involves partners outside the euro area. Outside Europe the dollar is generally the main currency used for international trade. Hence, exchange rate variability, particularly euro/dollar variability, is still an important determinant of European trade performance. The present chapter focuses on the likely impact of euro/dollar fluctuations on European Union manufacturing. Building on previous theoretical and empirical research which emphasises the difference in sensitivity to exchange rate fluctuations across sectors, we try to classify European sectors according to their sensitivity to dollar exchange rate fluctuations. Such sensitivity depends on the exposure to competition from the dollar zone and on the elasticity of sectors’ trade to exchange rate fluctuations. Exposure is measured by an original indicator which takes into account the fact that the dollar zone (that is, the zone of currencies which fluctuates more or less in conjunction with the dollar) is larger than just the United States. In particular, most Asian emerging countries belong to the dollar zone, as do countries in Latin America. The indicator of exposure to...

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