Scandinavia: Towards the European Monetary Union?

Abstract

The EU faces the most important structural crisis of its history, especially after the debt crisis of 2010 in the Euro Area, where the weaknesses of the European common currency were totally unveiled. The main purpose of this paper is to examine if the economies of Scandinavia are historically vulnerable and bound to the European economy (Euro Area). This would aid the further integration of the EU in the long run. Our analysis used the real effective exchange rates of Denmark, Norway, Sweden and Iceland, as a research instrument, by using the Error Correction Model (ECM) and the Asymmetric Dynamic Conditional Correlation GARCH model. Our empirical findings highly support that the economies of Denmark, Norway and Sweden are positively bound to the European economy. On the other hand, the economy of Iceland does not show integration with the European economy, despite its EEA membership. Furthermore, we found out that the currencies of Sweden, Norway and Denmark are more vulnerable to the market positive shock responses of the euro instead of negative shock responses. Finally, our study proposes that Sweden and Denmark might need to re-examine a possible EMU membership and Norway may reconsider a potential EU status. However, there are not enough evidence to provide a similar policy for Iceland.