The impact of EMU integration on GDP and productivity in the Baltic countries

Abstract

We examined the effect of the accession to the Eurozone using the method of synthetic control groups. This method enabled us to compare the performance of the Estonian, Lithuanian, and Latvian economies with a combination of countries that have not accessed the Eurozone yet. We constructed a synthetic Estonia, Lithuania, and Latvia model as synthetic control units from a donor pool to evaluate the impact of the Economic and Monetary Union (EMU) on macroeconomic performance through synthetic control groups. The donor pool in our model consisted of European countries that do not use the euro. We used annual data from 1990 to 2019 for models with GDP and productivity. The results indicate that deciding to enter the Eurozone could increase productivity – measured as GDP over employment. Or in other words - if these Baltic countries did not join the euro, their GDP per employer would be lower than the actual. Accession to the Eurozone or ERM II has not increased or decreased GDP in Baltic countries as much as productivity.