1. Price increases
I illustrated the early inflationary impact of the changeover in my working paper “Separated by A Common Currency: Evidence from the Euro Changeover.” This impact was a novel and interesting psychological effect of introducing a new currency with a difficult conversion for some legacy currencies, such as the peseta and the lira. My research, which I carried out with the late Augusto Rupérez Micola, provided evidence of the significant price increases that happened as a result of rounding (typically up) to the closest cent. For instance, before 1999 the normal price for a newspaper in Spain was 100 pesetas (the equivalent to 0.602 euros after changeover). Prices rapidly increased to one euro in less than five years.
2. Lower costs of capital
This early impact of the euro overshadowed the important effects of the single currency at a corporate level: by reducing currency risk and increasing the availability of funds, the euro significantly reduced firms’ costs of capital. A lower cost of capital has direct and indirect effects.
Directly, when capital is cheaper, companies are worth more. That is why euro-area stock markets displayed such a strong performance in the years following 2002. By 2007, both the Italian and Spanish stock markets had outperformed their German and US counterparts. With the emergence and dominance of digital platforms since then, this is no longer the case. Yet the original push to valuations caused by the euro was an important driver of capital attraction for some countries, especially those that had weaker currencies before the euro.
As for indirect effects of the reduction in firms’ cost of capital, my research has also shown that a very important consequence of the euro, especially prior to the 2008 crisis, was a significant increase in corporate investment. As a result, European companies have caught up with those from the US and China.
3. Integrated stock markets
What about the “strong-currency” countries? Even without taking into account the reduction in currency risk that using the euro implies for these countries (which is, in any case, small), its very introduction has integrated European capital markets in such a way that a German company, say, could tap investors in France or in Italy.
That is to say, the euro facilitated the integration of stock exchanges. Euronext, for example, was founded in 2000 by the merger of the Amsterdam, Paris and Brussels exchanges. To date, markets in Lisbon, Dublin, Milan and Oslo have also been integrated within it.