Monetary alignment or divergence? - Exchange rates and economic dynamics in non-euro European countries

Abstract

The far-reaching impacts of the euro's introduction in 1999 have reshaped Europe's monetary landscape, extending integration even to non-euro economies. The primary aim of this paper is to examine whether the non-euro European economies are monetarily linked to the Euro Area. Using economic indicators from nine European countries, alongside the Eurozone, and employing SVECM models, this research assesses the degree of monetary integration. The empirical findings strongly indicate that the economies of Poland, Romania, Sweden and Norway have been positively bound and highly integrated with the Eurozone since the euro's launch. Moreover, the economies of Czechia and Hungary have demonstrated a steady and increasing level of monetary integration with the Eurozone over time. In contrast, the economies of Iceland, Switzerland, and the UK exhibit monetary divergence from the Eurozone. Based on these findings, the research proposes that Poland and Romania may need to explore the possibility of joining the Euro Area, while Norway and Sweden may (re)consider their stance on potential EU or EMU membership, respectively. The results underscore that the creation of the Eurozone and the circulation of the euro have played a significant role in facilitating and advancing monetary integration across Europe.