Adopting the Euro: A Synthetic Control Approach

Abstract

We investigate whether joining the European Monetary Union and losing the ability to set monetary policy affected the economic growth of Eurozone countries. We use the synthetic control approach to create a counterfactual scenario for how each Eurozone country would have evolved without adopting the euro. We let this matching algorithm determine which combination of other developed economies best resembles the pre-euro path of twelve Eurozone economies. Our estimates suggest that most countries’ economic growth was not significantly affected. There were some mild losers (France, Germany, Italy, and Portugal) and a clear winner (Ireland). The drivers of these economic gains and losses are heterogeneous. First, we find that Ireland’s economic gains are more modest when excluding profits and income earned by foreigners. Second, our results show that adopting the euro spurred government consumption and trade and deterred private consumption and investment, on average.

Publication
Resubmitted to the European Journal of Political Economy