The Regional Impact of the Single Currency

While EMU will bring no change in policy regime as regards economic stabilisation at the regional (sub-national) level, the reduction of transaction costs as provided by the euro will give all regions of participating countries better access to the single market and may have an impact on regions’ competitiveness. Estimates on the static integration effects of the euro do not show a clear centre-periphery pattern due to the overlapping effects of, on the one hand, national factors as reflected in foreign exchange costs in the past and openness to trade and, on the other hand, regional factors as reflected in the sectoral structure of the regions. Dynamic integration effects on the regions brought about by the euro will reinforce the importance of regional characteristics for location decisions on investment, production and employment. Theory and evidence only allow for the conclusion that income convergence through trade and investment can be expected if regional competitive advantages, in particular regarding price and quality of labour, go hand in hand with a significant reduction of transaction costs, such as those provided by the combination of the single currency, the single market, a stable economic policy and an adequate infrastructure. * Views expressed in the paper are exclusively those of the author and do not necessarily correspond to those of the European Commission, for whose Directorate-General for Economic and Financial Affairs (DG II) the author is working. The author is grateful to several DG II colleagues for their helpful comments on an earlier version of the paper.