Regional Integration and Welfare State Generosity: A Synthetic Counterfactual Analysis of the EMU

Abstract

The effects of the introduction of the euro have been broadly studied by scholars in several fields. Recently, research has shifted its focus to the effects of the euro on income inequality in euro-adopting countries. This research commonly argues that the introduction of the euro negatively affected welfare state generosity which in turn negatively affects the inequality of income. However, the effect of the EMU on welfare state generosity has not been studied in detail. Therefore, this paper sets out to answer the question of whether welfare state generosity in EMU countries would have been higher or lower than its current levels, had these countries not adopted the euro as their currency. Using the synthetic control method developed by Abadie and Gardeazabal (2003), I estimate what would have happened to welfare generosity, had the euro not been introduced. The synthetic control method constructs a synthetic counterfactual for each euro-adopting country from a pool of donor countries and thus provides a counterfactual answer to the question of how the adoption of the euro influenced welfare state generosity in EMU countries. Overall, I find no strong evidence supporting the expectation that the introduction of the euro lowered welfare state generosity. This result challenges a widespread assumption about the impact of the euro on welfare states.