Monetary regimes and regional economies: A counterfactual perspective from two euro opt-outs

Abstract

This paper investigates the counterfactual impact of an alternative monetary regime on regional income and disparity within Denmark and Sweden, two EU countries that opted out of the euro at its introduction in 1999, using the synthetic control method. Our findings reveal that counterfactual income trajectories would have been highly heterogeneous: while most Danish regions would have experienced modest losses or gains, some Swedish regions might have recorded lower income levels under the counterfactual, although the evidence is mixed and concentrated in a small number of non-capital regions. We further analyze these outcomes in light of standard theories of monetary unions, finding that regions more open to trade and with greater capital intensity would have been more likely to benefit. Finally, we assess the implications for regional inequality, showing that the current monetary regime was associated with reduced regional income disparities in Denmark and produced mixed effects in Sweden.