Edited by Adriaan Dierx, Fabienne Ilzkovitz and Khalid Sekkat
Chapter 7: The sensitivity of European sectors to exchange rate fluctuations
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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