Is the euro the right way? : A study on the effect of implementing the euro on domestic unemployment.

Abstract: This paper aims to investigate how the domestic unemployment rate of a nation is affected by joining the European currency union and converting to the euro. This is done through the use of a synthetic control method, as well as an augmented version of the model, where I define the Euro Area countries as the treatment group, and conversion to euro as treatment. In line with the predictions of previous related theoretical frameworks such as the optimum currency area theory, the gravity theory and Matusz’s equilibrium model, the findings in this paper suggests that conversion to the euro leads to a short-term decrease in domestic unemployment. The effect is likely due to the short-term increase in trade, specifically within-union trade, that arises from joining the EMU.