Europe Without Borders? The Effect of the Euro on Price Convergence

Abstract

Has the introduction of the Euro reduced the economic significance of national borders across the Euro Area? This article extends Engel and Rogers well known work on border effects to cities across Western Europe over the period 1995—2004. Although cross-border prices across the Euro Area are still more volatile than within-country prices, the importance of the border has diminished since the euro was introduced in 1999. The impact of the common currency on the border effect varies by country size, with the largest decreases occurring between larger Euro countries. Although cross-border price volatility has not changed between the United Kingdom and large Euro countries, volatility has actually increased between the small Euro countries and the United Kingdom. These results are consistent with the fact that exchange rates are more likely to adjust to price differentials between small countries than between large countries.