Should We Turn Back Time? A Synthetic Control Study on the Trade Effects of Sweden’s Choice Not To Enter the Eurozone

Abstract: The formation of the Economic and Monetary Union, combined with the introduction of the euro, further deepened a long-going European economic integration. Sweden has been a member of the European Union since 1995 but has not yet given up its independent currency. In this study, we estimate the trade flows that would have occurred between Sweden and its major trading partners if Sweden had joined the euro in 1999. Furthermore, we use the synthetic control method to estimate the causal effect on trade of Sweden's choice not to enter the euro. We create a counterfactual scenario where Sweden joins the euro and compare these synthetic outcomes with actual Swedish outcomes. Our results suggest that if Sweden had joined the euro, aggregate export flows between Sweden and euro countries would have been 80% higher in 2019, and aggregate import flows would have been 16% higher in 2019 if Sweden had adopted the euro. We also estimate the (hypothetical) euro's effect on trade flows between Sweden and Sweden's biggest non-euro trading partners. According to our findings, adopting the European currency would have resulted in 30% higher export flows and 25% higher import flows in 2019 between Sweden and its seven biggest non-euro trading partners.