The Euro adoption’s impact on extensive and intensive margins of trade: the Italian case

The recent theoretical literature has focused on the importance of extensive and intensive margins of trade in the case of the Euro adoption. But few works have investigated the effects of the euro introduction on the extensive and intensive margins of trade. All these studies have used disaggregated bilateral flows data (6 digit). However, not even the finest level of disaggregation in the publicly available trade data is enough to single out individual products. We try to fill this gap by using a unique dataset taken from ISAE surveys on Italian manufacturing firms. From this quarterly survey it is possible to obtain information about both the structural characteristics (geographical location, industrial sector of activity, number of employees) and exporting behaviour of firms. We concentrate our analysis on the period 1997-2001, covering the two years before and the three years after the euro introduction., In line with large part of the empirical literature on bilateral trade, we estimate a gravity equation using a Hausman and Taylor estimator (HT). Our results show that the introduction of the euro has not had any effect on export turnover. This evidence seems to match other empirical findings on Italy, both at aggregate and sectoral level. However, interaction terms between the euro dummy and the group of “entering firms” (firms that started to export after the euro introduction) and that of “persistent firms” (firms that exported in the euro area before and after 1999) are positive and statistically significant, showing a positive effect of the common currency on extensive and intensive margins of trade. Indeed, the magnitude of the coefficient of the former is higher than the latter: in the Italian case, empirical findings for the Euro area as a whole seem to be confirmed. In our view, the euro introduction has had a positive effect on the extensive margin: a small group of firms benefited from it by starting to export in the Eurozone market. However, the total size of this group is very small; this finding may be due to the average small size of Italian manufacturing firms and to their scarce presence in the ICIR sectors (Imperfect Competition and Increasing Return sectors). Following theoretical indications, these latter are sectors that may have benefited more from the euro introduction: firms usually have lower marginal costs and they can easily cover the fixed costs of export activity if these costs are reduced, as they are when a common currency is introduced.