This thesis investigates in what way trade flows in Europe have been altered and differ for
countries belonging to a preferential trade agreement as well as a common currency area.
More specifically, how exports among the European countries are affected by memberships
with the European Union and the EMU. A total of 72 countries have been chosen
which represents the main trading partners between the EU and the rest of the world. Out
of these 72 countries, 25 represent EU members which include 12 EMU member countries.
The econometric analysis employ a gravity model with 18 variables in order to determine
their impact on trade flows. This is done through a regression with a log-log equation
where the dependent variable is export. The other variables included are chosen to explain
export flows among the EU members as well as their trade with EMU countries and the
rest of the world. Furthermore, variables representing trade affinities are included to determine
whether or not they have a significant effect on trade.
The regression is divided into four time periods in order to more easily determine how the
trade pattern in Europe have altered from the establishment of the EU and the EMU. The
first time period represent an early state of EU membership, the second a mature state of
EU membership, the third when EU was reformed and the fourth an early state of EMU
The regression results illustrate that the majority of the selected variables are significant but
most importantly that the trade affinity variables are proven to have an impact on trade
flows. The results also show that trade has increased and that in the case of EU membership
it is more profitable to join than to remain outside. Moreovr, the result show in particular
that countries that belong to the EMU have a stronger orientation of their exports
to the rest of the world then other EU countries. For the latter, the European market is of
As some of the European Union members have chosen not to convert to the EMU, further
questioning have emerged on its importance for the whole union. By comparing the
trade flows of those who have chosen not to convert to the EMU with members who
have, this paper will hopefully bring some light on export patterns of countries being EMU
members and other EU countries in comparison with world countries. Furthermore, the
analysis stretches over a time period of 1982 up to 2005 which have been carefully selected
in order to be able to compare trade flows of EU members in their trade with other EU
members as well as with other countries for each period, where the number of EU members
increases for each additional time period.
Presentation of the Problem
This paper aims to analyse what the effects have been on trade for the European countries
after the establishment of the European Union. Furthermore, we wish to see if trade patterns
have been affected by the introduction of EMU in the European countries. We hope
to be able to draw conclusions on to what extent the European countries may have gained
from the continuous integration through the European Union as well as the EMU.
To be able to see these effects we have chosen to look at four time periods. Period 1 will
represent 1982-1984, period 2 represents 1989-1991, period 3 corresponds to 1996-1998
and the final period 4 represents 2003-2005. These time periods were included in order to
investigate how trade flows within the European Union have changed over time. Furthermore,
the analysis is expected to show changes in trade flows by member countries converting
to a common currency. More specifically we have chosen to look at the member
states in 2005, commonly known as EU25 (See Appendix 1). Also, EU’s 72 main trading
partners in the world have been chosen in order to give a better estimation of the EU
members trading. For a list of all included countries in the regression see Appendix 2.
The analysis of our regressions will investigate whether or not the European Union and the
EMU have had a significant impact on trade patterns in Europe.
The purpose of this paper is to test how trade flows among the European countries have
altered due to the expansion of the European Union. The analysis also compares how export
flows differ between EU- and EMU-members.
Author: Louise Buhre and Jannice Söderström,