Competitiveness and Real Exchange Rates in the Eurozone: Has the Euro Fostered Price Convergence?

This paper critically examines the impact of the euro’s adoption on price convergence among the initial twelve Eurozone member states. Employing advanced econometric methods, it analyzes the stationarity of real exchange rates and the dynamics of price level convergence to evaluate whether the euro has facilitated the attainment of Purchasing Power Parity and convergence in international competitiveness within the Eurozone. While the euro was theoretically expected to reduce transaction costs and promote greater price alignment, empirical findings reveal notable inconsistencies in price convergence across the region. The loss of nominal exchange rate flexibility has hindered the realization of PPP, with divergent outcomes among member states. The results suggest that the Eurozone has not uniformly addressed disparities in price levels and competitiveness; instead, it may have functioned as an amplifier of pre-existing asymmetries. Furthermore, the study concludes that PPP is not universally valid, raising critical concerns about the theoretical assumptions and policy frameworks that rely on this principle. JEL CLASSIFICATION CODES C22, F31, F40