What if the euro had never been launched? A counterfactual analysis of the macroeconomic impact of euro membership

The aim of this paper is to gauge quantitatively the macroeconomic impact of EMU membership. Building on the Global VAR framework designed by Pesaran et al. (2004), we want to shed light on the following important questions: What if the euro had never been launched? How would national outputs and inflation rates have evolved? We show that monetary unification promoted lower interest rates and higher output in most euro area (EA) countries, relatively to a situation where national monetary policies would have followed a German-type one. If national monetary policies had adopted British monetary preferences after September 1992 however, this would have led to higher interest rates, depreciations of national exchange rates and higher output in most EA countries, especially over the 1992-1998 period. This is particularly true for the three biggest countries of the EA (France, Germany and Italy). Besides, the single currency regime probably did not have a massive impact on price developments.