Currency Unions and Global Value Chains: The Impact of the Euro on the Italian Value Added Exports

Abstract

Many estimates of the effect of the common currency on trade have been made, although a clear answer has yet to be given. This work analyses the trade effect of the euro by providing a twofold contribution. First, one of the main stylised facts that has emerged from the recent literature is that trade flows in gross terms can differ substantially from those measured in value added terms. Accordingly, we focus on the structure of global value chains rather than conventional gross trade. To this aim, we provide an estimate of the value added trade flows that would have existed between Italy and its main trading partners if Italy had not joined the monetary union and show how, and to what extent, international production sharing has been affected. Second, we use a methodology that is different from traditional, parametric ones. Specifically, we apply the synthetic control method to construct appropriate counterfactuals and estimate the causal impact of the euro. Our empirical analysis provides a relevant case for considering value added in addition to gross trade since it shows that the euro facilitated the forward integration of Italian exports, whereas it slowed down backward integration. Overall, these results suggest that the euro had an impact on Italian global value chain participation by altering value added flows across member as well as non-member states, with great heterogeneity in the results across value added trade components and sectors.