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European Monetary Union and International Tourism

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  • Egon Smeral

    (WIFO)

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    Abstract

    The single European currency has direct (elimination of currency-exchange costs, low interest on borrowed capital, stable nominal exchange rates between EMU participants) and indirect effects (on real income and growth) on European tourism: • Following the introduction of the single currency, tourists will no longer be burdened with the costs of currency exchange and therefore feel a positive income effect. Hence, they will have a larger disposable budget, which may result in higher demand for other goods and services. However, besides these positive effects on income, there will also be a shift in demand, with destinations within EMU becoming cheaper relative to those outside EMU. Demand for destinations within the euro zone from outside EMU may tend to increase, although the effects are expected to be fairly insignificant on account of the relative price decline. • The creation of EMU results in a one-time drop of long-term interest rates. In the field of tourism, a lowering of interest rates would grant the small and medium-sized businesses of the hotel and catering sector, many of them highly in debt, some financial breathing space. This might result in more capital spending and an increased competitiveness. • In the field of tourism, the exchange-rate turbulence of the 1990s have had a noticeable influence on the development of market shares. Owing to the introduction of the single European currency, shifts of international travel flows under the impact of exchange rate fluctuations will no longer occur in the euro zone. Hence, price-related influences of travel flows within the euro zone will only be due to regional price differences, which are, however, limited to a relatively narrow margin on account of the stability pact. Austrian tourism, in particular, will benefit from the single currency, since soft-currency countries are expected to experience comparatively stronger price increases. Stable exchange rates also eliminate the need for rate hedging, which in turn may induce travel operators to offer their products at lower prices. • The establishment of the European Monetary Union with a single currency and a central monetary policy results in a higher level of efficiency and capital accumulation than can ever be achieved in a situation with different currencies, which in turn generates higher economic growth and stimulates activities in tourism. To assess the effects of the establishment of EMU, a forecasting model designed for international tourism was used; the baseline version of the forecast was compared with the hypothetical case of non-establishment of EMU (simulation version). An attempt was made to identify the effects of EMU by looking at the development of the balance of tourism for the period from 1999 to 2003 relative to GDP. Under the impact of EMU, Austria will achieve an increase of its cumulative balance of tourist travel by 1.5 percent of GDP and, hence, be among the clear winners of EMU in this respect, besides Germany and France. The biggest hypothetical losses due to the introduction of the single currency will be suffered by Finland and Italy (–1.3 percent and –1.2 percent of GDP, respectively). In general, an analysis of cumulative balances shows that the hard-currency countries will benefit from EMU, while the soft-currency countries have to expect some losses.

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    Bibliographic Info

    Article provided by WIFO in its journal WIFO-Monatsberichte.

    Volume (Year): 72 (1999)
    Issue (Month): 3 (March)
    Pages: 187-195

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    Handle: RePEc:wfo:monber:y:1999:i:3:p:187-195

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    Keywords: Europäische Währungsunion und internationaler Tourismus; European Monetary Union and International Tourism;

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    1. Breuss, Fritz, 1997. "The Economic Consequences of a Large EMU � Results of Macroeconomic Model Simulations," European Integration online Papers (EIoP), European Community Studies Association Austria (ECSA-A), vol. 1, 05.
    2. Baker, Terence J. & FitzGerald, John & Honohan, Patrick, 1996. "Economic Implications for Ireland of EMU," Research Series, Economic and Social Research Institute (ESRI), number PRS28.
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