6. Conclusions and policy recommendations
The evolution of trade flow among the original members of the European Monetary Union has been characterized by the initial rise and subsequent fall of trade and current account balances on the one hand, and a continuous reduction in the share of intra-EMU trade with respect to total trade on the other. While the first factor has been widely investigated because of the connection to the area's prospects for recovery, the reduction of intra-EMU trade shares has received little attention. In this paper, we have argued that the reduction of intra-EMU shares and the development of imbalances are – at least partially – the result of core–periphery differences in trade creation and trade diversion effects associated with the introduction of the single currency and with the ongoing globalization process. Differing from the literature on the euro effect on trade, these effects have been estimated by testing the significance of structural changes for the countries that joined the monetary union on the variables representing the main causes of imbalances – financial integration, divergences in price/nonprice competitiveness, and global technological changes. The divergence between core and peripheral countries of the EMU has been taken into account by allowing coefficients to vary between the two groups.
