Euro Effect on Unemployment and Economic Growth from an Intra-EuroTransaction Perspective

OBJECTIVES: The purpose of this study is to assess the effect of the “Euro enhancement on Euro Area’s 12 (EA₁₂) economic growth” on unemployment, and whether this enhancement has a greater effect than domestic investment has on unemployment. The enhancement of the Euro on EA₁₂’s growth is determined by two intra EA₁₂ transactions: exports and inward foreign direct investment (FDI).

DATA & METHOD: The impact of the Euro on unemployment and economic growth of EA₁₂ is tested using a fixed effect model both on a balanced panel of 12 EA countries, and on a panel of 8 EA countries, in order to test the robustness of the results. The time period covered is 8 years due to data availability, from 1999 to 2006. The panel of 8 EA countries consists of Austria, Finland, France, Germany, Italy, Netherlands, Portugal, and Spain; countries for which full data is available for the time period examined. In addition, Belgium, Greece, Ireland, and Luxemburg – data missing for some years – are added for the generation of the balanced panel of 12 EA countries.

RESULTS: The findings of both panels indicate that from an intra EA₁₂ transaction perspective, the enhancement of the Euro on EA₁₂’s economic growth does not decrease unemployment, except for the case of Italy. For the rest of EA12 countries, the Euro enhancement on EA₁₂’s economic growth presents a positive relation to unemployment. In addition, domestic investment is by far superior to EA₁₂ flows – intra EA exports and inward FDI – in the fight against unemployment.