Economic Insecurity and Support for the Euro

SARA BINZER HOBOLT

Department of Politics and International Relations

University of Oxford

sara.hobolt@politics.ox.ac.uk

+44 1865 278830

PATRICK LEBLOND

Graduate School of Public and International Affairs

University of Ottawa

pleblond@uottawa.ca

+1 613 562 5800 (ext. 2953)

**Draft paper. Comments most welcome**

Paper prepared for presentation at the Annual Meeting of the American Political

Science Association, Toronto, Canada, September, 3‐6, 2009

Abstract

In light of the recent economic crisis, this paper examines how economic

conditions shape public attitudes toward the European Union’s single

currency, the euro. We argue that attitudes towards the euro are shaped by

both utilitarian and symbolic concerns, but that economic insecurity is a key

factor explaining support for the euro both inside and outside the eurozone.

The effect of economic insecurity on aggregate euro support is mediated by

eurozone membership status as well as economic structure, notably whether

the economy is more dependent on manufacturing or services. Our time‐

series cross‐section analysis of euro support from 1999‐2008 in 28 countries

corroborates these propositions.

1. Introduction

Following its special report on the euro area, which celebrated its tenth anniversary

on January 1, 2009, The Economist concluded that “the euro has proved a haven in the

economic crisis—so much so that no country seriously wants to leave it and plenty

want to join” (Leaders, June 13, 2009, p. 15). In Iceland, following the country’s

banking meltdown in October 2008, a majority of people supported euro

membership. According to a Capacent Gallup poll conducted in January 2009, 56% of

respondents indicated that they preferred to adopt an international currency rather

than keep using the Icelandic crown, which only 22% supported. From this anecdotal

evidence, we might be inclined to think that the recent economic and financial crisis

has been beneficial in consolidating the euro’s legitimacy and popular support in

Europe.1

Unfortunately for euro enthusiasts, the popular view of the euro as a safe

haven in times of crisis does not hold across Europe. In a recent Eurobarometer

survey (European Commission 2009, EB 71.1), only 39% of EU‐27 respondents

expressed the view that the euro had mitigated the negative effects of the economic

crisis, whereas 44% thought that this was not the case. When asked if their country

would have been better protected in the face of the current financial and economic

crisis if their country had kept its (former) national currency, almost half of

respondents agreed. Outside the eurozone, 36% agreed that adopting the euro would

have offered better protection against the crisis, whereas 46% disagreed. Even in the

United Kingdom, which has been hit hard by the recent financial crisis, support for

adopting the euro has not budged. According to a YouGov opinion poll in January

2009, euro support stood at 24%, which is two percentage points below where it was

in early 2005 (according to a MORI/Citigroup survey) when the UK’s economy was

performing well.

Clearly, economic insecurity as a result of the economic and financial crisis is

not necessarily associated with a more favorable view of the euro, whether one is

inside or outside the eurozone. As with the UK case, other factors seem to influence

1 Another debate surrounding the euro and the economic and financial crisis deals with whether the

euro will replace the US dollar as the world’s main reserve currency (for instance, see Chinn and

Frankel 2008, Cohen 2008, Papaioannou and Portes 2008, and Posen 2008).

people’s opinion vis‐à‐vis the euro. But what are they? How does economic

insecurity shape support for the single currency both inside and outside the

eurozone? These are the questions that the current paper seeks to answer. Although

several studies have examined the determinants of euro support, none has yet relied

on a dataset as extensive as the one used herein, which includes recent accession

countries from Central and Eastern Europe as well as the Mediterranean and tracks

support over time.2 By analyzing support across a wider range of countries, we show

that important differences exist between eurozone insiders and outsiders as well as

within each category, depending on whether a country’s economy is more

dependent on manufacturing or services. Furthermore, the paper extends the

existing literature by focusing directly on the impact of economic insecurity on

popular support for the euro. If policy‐makers want to sell the euro as a safe haven or

a solution to EU member states’ economic problems, they need to understand the

factors that influence Europeans’ opinion about the euro.

The paper is organized as follows. In section 2, it reviews the literature that

explains support for the euro. In section 3, it develops a series of testable hypotheses

regarding factors that affect popular support for the euro. For their parts, section 4

describes the data used in the analysis while section 5 presents the methods adopted

for conducting the econometric analysis and its results. Section 6 discusses the

implications of these results for the relationship between economic insecurity and the

legitimacy of the euro, especially in light of the recent economic and financial crisis.

In the final section, the paper concludes on the contributions of the paper to the

literature on the determinants of public support for the euro as well as presents

recommendations to policy‐makers who want to increase the euro’s legitimacy with

Europeans.

2 Allam and Georres (2008) and Banducci et al. (2009) are notable exceptions in that they also focus or

extend their analysis of popular attitudes toward the euro to Central and Eastern European countries;

however, they do so only with individual‐level cross‐section data (based on a single Eurobarometer

survey in each case).

2. Explaining Public Support for the Euro

In the extant literature, two alternative perspectives have been applied to explain

variation in both individual‐level and aggregate‐level support for the EUʹs single

currency: utilitarian rationality and symbolic concerns. From a utilitarian

perspective, generic support for European integration is determined by a rational

cost‐benefit analysis: those who benefit economically from European integration

(particularly trade liberalization) are supportive, whereas those who stand to lose are

more hostile (Gabel 1998a, 1998b; Gabel and Palmer 1995; McLaren 2006). Given the

direct economic implications of monetary integration, it is therefore not surprising

that most scholars have analyzed support for the euro from the standpoint of

economic self‐interest. Monetary integration should lead to increased trade (see Rose

and Stanley 2005) and, as a consequence, individuals with high involvement in

international trade should favor the euro more than individuals employed in the

non‐tradable sector (Gabel 2001; Gabel and Hix 2005; Banducci et al. 2009). Studies of

support for the euro have also found that sociotropic economic concerns play a role

(Banducci et al., 2003, 2009; Kaltenthaler and Anderson 2001). In countries where the

euro is expected to bring about greater economic stability, people are more in favor

of joining the currency union. For instance, Gärtner (1997) found that, prior to the

creation of the euro, citizens in EU member states with a looser fiscal policy and high

deficits were more likely to support the euro (see also Gabel 2001).

An alternative explanation for the variation in support for the euro, and

European integration more generally, focuses less on economic self‐interest and more

on the threat that European integration can pose to national identity and a country’s

symbols and values (see McLaren 2002, 2004, 2006; Hooghe and Marks 2004; Carey

2002). Several studies have shown that attachment to the nation, and particularly

“exclusive” national identity, is a powerful predictor of negative attitudes towards

European integration (McLaren 2006; Hooghe and Marks 2004). In the context of the

euro, an important symbol of national identity is the national currency (Cohen 1998;

Hobolt and Leblond 2009). Helleiner (2003) argues that the creation of national

money has traditionally been closely associated with nation‐state building, as a

means of giving the inhabitants of a political entity a sense of collective identity. It is

therefore not surprising that feelings of national identity and diffuse support for

European integration influence individual’s opinion about monetary integration

(Gabel and Hix 2005; Kaltenthaler and Anderson 2001). In the context of the

referendums on joining the euro in Denmark and Sweden, Jupille and Leblang (2007)

have found that “identity concerns” played a greater role than “pocketbook

calculations” in both referendums. Generally, citizens who thought that the EU

undermined national sovereignty and democracy were more likely to vote against

the euro’s adoption. Similarly, Hobolt and Leblond (2009), arguing that the strength

of a currency is positively related to its symbolic value, have found that exchange

rates influenced support for the euro in both Sweden and Denmark prior to the

referendums. In Denmark, where the krone has been fixed to the Deutschemark

(before 1999) and the euro (since 1999) for years, the weakening (i.e. depreciation) of

the euro vis‐à‐vis the US dollar led to a decline in Danes’ support for the European

single currency. In Sweden, where there has been a flexible exchange rate for years,

the strengthening (i.e. appreciation) of the krona against the euro saw opposition to

eurozone membership increase.

Hence, existing work has clearly demonstrated that economic calculations

and symbolic concerns play an important role in explaining variation in support for

the euro between countries and across individuals within nations. Yet, the question

still remains about how the recent changes in economic conditions influence support

for monetary integration, and particularly how the current economic climate may

have different effects on public opinion for the monetary integration inside and

outside the currency union. To understand how the economic crisis has affected, and

will continue to influence, support for the euro, we need to examine how changing

economic conditions affect attitudes towards the euro. The existing work on the euro

has provided limited insights into the dynamics of public support for the euro, as

most studies have focused on cross‐sectional variation (across countries or

individuals) in support rather than over time change. In addition to the study by

Hobolt and Leblond (2009), which considers monthly changes in euro support, a

notable exception is the work conducted by Banducci, Karp and Loedel, who

examine public support for the euro before (Banducci et al. 2003) and after (Banducci

et al. 2009) the introduction of euro. Using pooled Eurobarometer survey data from

15 “old” EU member states, they find, among other things, that the appreciation of

the currency is associated with higher levels of support for the euro.

These studies make an important contribution to our understanding of

support for European monetary integration as they show that changes in economic

conditions lead to changes in support for the euro. Yet, they also raise additional

questions: to what extent do such relationships depend on whether or not a country

belongs to the eurozone? And what about differences in countries’ economic

structure? How do they affect the relationship between economic conditions and

support for the euro? The next section presents a theoretical explanation of support

for monetary integration that seeks to provide answers to these questions, and the

subsequent sections of this paper test these explanations in a time‐series‐cross

sectional analysis of euro support in 28 countries since the birth of the eurozone in

3. Economic Insecurity and Euro Support

Economic crises create a heightened sense of insecurity among individuals. People

fear that they will become unemployed, which then makes it more difficult for them

to pay back loans and mortgages. At the same time, they fear that the value of their

assets (houses, investments, pensions, etc.) will decline, which also makes it more

difficult for them to face up to their liabilities. Moreover, if part or all of their

liabilities is denominated in foreign currency and the relative value of the national

currency tumbles, then debts become even more expensive to pay back (assuming

that assets are denominated mostly in national currency). Naturally, following the

utilitarian perspective outlined above, citizensʹ evaluations of the euro should be

influenced by whether they feel that monetary integration exacerbates (or would

exacerbate) this economic insecurity or whether it protects (or would protect) them

from the consequences of crisis. The extent to which citizens feel that European

monetary union (EMU) has or would have offered protection from the economic

crisis varies considerably across countries. For instance, among individuals in

eurozone member states, the percentage of respondents who think that they would

have been better protected from the recent economic and financial crisis if their

country had not adopted the euro varies between 16 percent in Slovakia to 62 percent

in Portugal (see Figure 1a). Outside the eurozone, we find similar differences. For

instance, only 17 percent of surveyed Bulgarians think that the euro would have

offered better protection against the crisis than their national currency, compared to

61 percent of Hungarian respondents (see Figures 1b). These wide variations in

responses beg the question as to how economic factors shape citizens’ feelings of

whether the euro protects against insecurity or, in fact, exacerbates economic

insecurity, not only in times of crisis, but also in general.

[INSERT FIGURES 1a AND 1b ABOUT HERE]

To begin with, it is important to note that the effect of economic conditions on euro

support should depend on whether or not a country is already a member of the

eurozone. We expect that citizens outside the eurozone are more in favour of joining

the eurozone when they are experiencing worsening economic conditions than when

such conditions are improving. When they perceive economic conditions to be

deteriorating, they are more likely to think that belonging to the eurozone will

generate more economic stability and prosperity. In contrast, citizens in countries

inside the eurozone are expected to view the single currency more favourably when

economic conditions are good than when they are bad, since they are likely to

attribute the economic climate, at least in part, to the monetary policy of the

European Central Bank (ECB) and the fiscal requirements of the Stability and

Growth Pact.3 Hence, when consumer confidence is low, we expect higher levels of

support in ʹoutsiderʹ countries, but lower levels of support inside the eurozone.

Equally, we would expect that objective indicators of economic conditions, such as

unemployment, inflation and economic growth, will influence support in opposite

directions outside and inside the eurozone. For instance, higher unemployment or

inflation should be associated with greater support for the euro outside EMU but

3 It should be noted that the constraints imposed by the Stability and Growth Pact are rather weak (see

Heipertz and Verdun 2004; Leblond 2006).

lower support inside the eurozone, while the opposite should hold for economic

growth. Since interest rates are directly linked to the management of the monetary

union, we expect them to have a greater effect on support inside the union, where

lower interest rates should be associated with higher levels of support. This leads us

to formulate the following hypotheses:

H1: Public support for the euro in non‐eurozone countries increases as economic

conditions worsen.

H2: Public support for the euro in eurozone countries decreases as economic

conditions worsen.

H3: Lower interest rates increase support for the euro in eurozone countries.

Another important factor that should condition the effect of economic conditions on

euro support is a countryʹs economic structure. If monetary integration is considered

good for trade, then individuals’ opinion about adopting the euro will depend on

their labor market association: in the tradable or the non‐tradable sector (see Gabel

2001; Hix and Gabel 2005). But such a demarcation is insufficient; the international

competitiveness of an economy’s tradable goods and services also matters. For

example, people who work in an industry that is finding it difficult to compete

internationally and where, as a result, jobs are threatened are less likely to support

factors that contribute to this loss of competitiveness, e.g. free trade, inflation or an

appreciated (strong) currency. Ideally, international competitiveness increases along

with productivity, whereby the same amount of inputs (labor and capital) are able to

produce more output. This usually happens as a result of innovation. But

competiveness can also improve (decline) when a country’s currency depreciates

(appreciates) relative to others as exportable goods and services become cheaper

(more expensive) in foreign currency terms. This depends, however, on whether

imports are used as inputs into the production of exports, since a depreciated

(appreciated) currency makes imports more (less) expensive. This is why Frieden

(1991) argues that producers of non‐tradable goods and services should prefer a

strong currency whereas export‐oriented producers of tradables and import‐

competing producers of tradables for the domestic market should favor a weak

currency. A depreciated (appreciated) currency also hurts (benefits) consumers who

buy foreign goods and services, who as a result of changes in the exchange rate see

their purchasing power decline (improve).

The progressive appreciation of the euro against the US dollar between 2002

and mid‐2008 (see Figure 2) has been a problem for those European firms (1) that are

located within the eurozone or in a country that has its national currency pegged to

the euro and (2) whose goods compete against those of producers located in China

and other East Asian countries that peg their currencies to the dollar (Palley 2007).4

This means that individuals who work for such European firms are unlikely to be

favourable to a strong euro relative to the US dollar. In return, they should not be

very supportive of the euro itself when it is strong and leads their employer to

become less competitive against foreign producers in Europe and the United States,

which are the two markets where the majority of both European and East Asian

goods are sold (i.e. exported) to. The larger the number of households (workers and

their families) facing economic uncertainty because of a strong euro that one finds in

a given country, the lower the aggregate support for the euro in that same country is

likely to be.

The appreciation of the euro should be especially problematic for Central and

Eastern European and Mediterranean (CEEM) countries, whose economies rely to a

large extent on manufacturing (often of low value‐added products like textiles,

apparel, shoes, etc.) than on services, since their products compete directly with

those coming from countries such as China (see Pisani‐Ferry and Sapir 2008). The

appreciation of the euro can also indirectly affect CEEM countries negatively if it

means that a not insignificant portion of their exports serve as inputs into the exports

to the US of countries such as Germany and France. In such a case, the demand for

4 If the Chinese yuan (or renminbi) and other currencies from emerging East Asian countries are pegged

to the US dollar and the latter depreciates against the euro, then the euro also appreciates against the

East Asian currencies (see Figure 2 for the case of the Chinese yuan).

inputs from CEEM countries would slow down as German or French goods become

more expensive internationally as the euro appreciates against the dollar.

Following from the above discussion of the euro’s strength against the US

dollar, we can formulate the following hypothesis:

H4: Public support for the euro in countries where the economy is dominated by the

manufacturing industry declines as the euro appreciates.

[INSERT FIGURE 2 ABOUT HERE]

This hypothesis assumes that the effect of exchange rates on euro support depends

entirely on utilitarian calculations of the effect of monetary integration on economic

insecurity. But, as discussed above, support for monetary integration is also affected

by a different kind of insecurity, namely the insecurity related to feelings of identity,

where ʹout‐groups pose threats to important symbols that the in‐group holds to be

dearʹ (McLaren 2006: 69). The currency acts as an important symbol of the ʹin‐groupʹ.

In the case of euro outsiders, the national currency is a symbol of the nation and,

hence, the symbolic value of the national currency must be positively related to its

strength vis‐à‐vis other currencies (Hobolt and Leblond 2009). In other words, we

expect that people in countries with weaker currencies will be more favourably

disposed towards the adoption of the euro, ceteris paribus, than people in countries

with stronger national currencies. For euro insiders, however, the euro is the

ʹnational currencyʹ and hence we would expect that they view the monetary union

more positively when the value of the euro increases against its main ʹrivalʹ currency,

the US dollar (Banducci et al 2009). In both these situations, utilitarian and symbolic

considerations may, of course, lead to different perceptions of how exchange rate

affects economic and identity insecurities. In general, we would expect that symbolic

concerns matter more when it comes to the value of the national currency than the

euro currency, since most citizens have a stronger affective attachment to their

national currency (and their nation) than people living in the eurozone have to the

euro (and the EU). This means that in the case of eurozone countries where the

economy is dominated by the manufacturing industry the utilitarian consideration is

likely to dominate the symbolic one. For eurozone economies dominated by the

services industry (and where the manufacturing industry tends to produce high‐

valued goods), the utilitarian perspective should either go in the same direction as

the symbolic one (e.g., a strong euro vis‐à‐vis the dollar makes the import of

intermediate as well as consumer goods cheaper) or the latter’s effect should

dominate that of the former. This leads to the following hypotheses:

H5: Public support for the euro in non‐eurozone countries increases as the national

currency depreciates against the euro, ceteris paribus.

H6: Public support for the euro in eurozone countries where the economy is

dominated by the services industry increases as the euro appreciates against the

dollar, ceteribus paribus.

Finally, we also expect that general levels of diffuse support for the European Union

will affect support for monetary integration. In countries where citizens feel that the

European Union poses less of a threat to national sovereignty and identity, they are

more likely to favor monetary integration.

H7: Public support for the euro is higher when diffuse support of membership of the

European Union is higher.

In the next sections, we present the data and methodology used to test the

hypotheses developed above as well as the results of this test.

4. Data

To examine public support for monetary integration, we rely on data from the

Eurobarometer (EB) and the Candidate countries Eurobarometer (CCEB), which are

conducted twice a year on behalf of the European Commission, surveying citizens in

each of the member states and candidate countries about their opinions on European

matters. We aggregate responses to a question about whether one was for or against

a “European Monetary Union with one single currency, the EURO” for each of the

27 EU member states plus Turkey, for the period from the introduction of the euro in

1999 to 2008 (the latest year where surveys were conducted).

Figure 3 displays the proportion of respondents who said they were in favor

of a single currency across four distinct groups of countries. The first group, Eurozone

12, is comprised of the eleven EU member‐states that formed the eurozone when the

euro came into existence on 1 January 1999. It also includes Greece, which was

admitted on 1 January 2001. The second group comprises the four Newcomers that

joined the eurozone at a later date: Slovenia, which joined on 1 January 2007; Cyprus

and Malta, which were admitted on 1 January 2008; and Slovakia, which joined on 1

January 2009. The third group, the Euro outsiders, represents the countries that have

chosen to remain outside the eurozone until now, despite being able to meet the

Maastricht convergence criteria: Denmark, Sweden and the UK. In both Denmark

and Sweden, the governments have been in favor of adopting the euro, but the

electorate rejected the proposal in referendums in 2000 and 2003. In Britain, the

official position of the government is that it is ʺin principle in favour of UK

membership of the euro but in practice the economic conditions must be rightʺ (UK

Treasury 2009). The final group is composed of the Euro hopefuls, which are the

remaining nine EU member states that have an official policy of joining the eurozone

when they meet the convergence criteria and Turkey, which is an EU candidate

country.5

[FIGURE 3 ABOUT HERE]

Figure 3 shows an increase in support for the euro in both insider and outsider

countries after the physical coins and banknotes were introduced on 1 January 2002.

Not surprisingly, support for the euro is the lowest in the countries that have

voluntarily remained outside the eurozone and is the highest inside the zone. There

5 The two other official EU candidate countries are Croatia and FYR Macedonia, but we do not have sufficient time series data for those two countries to include them in our analysis.

has been a decline in support among ʹeuro hopefulsʹ in recent years, but an increase

in support among the ʹnewcomersʹ, especially after they have adopted the currency.

In order to explain these changes and differences in euro support and test our

hypotheses, we rely on a number of indicators. The level of diffuse EU support is

operationalized as the proportion of respondents who say that ‘EU membership is a

good thing’ in each country, using Eurobarometer data. We also include a number of

economic indicators in our model. Most importantly, we include the exchange rate

between the US dollar and the euro. For euro‐outsiders, we also include the

exchange rate of the national currency against the euro. Because it reflects the central

bank’s ability to conduct monetary policy effectively (i.e. to maintain prices relatively

stable), the inflation rate is one of the economic measures included the analysis.

Other economic indicators are the unemployment rate, the short‐term interest rate,

and the GDP growth rate. Finally, a consumer confidence index serves to measure

subjective economic expectations; it gauges consumersʹ feelings about the current

condition of the economy and their expectations about the economyʹs future

direction. Details on data and their sources can be found in Appendix 1.

As discussed above, we expect the impact of these economic factors to

depend on whether a country is inside or outside the eurozone as well as whether its

economic structure is dominated by an export‐oriented manufacturing sector (where

citizens are sensitive to the loss of competitiveness resulting from a strong currency)

or by the services industry (where a strong currency is less likely to have a negative

impact on the economy, and in turn on people’s job security). We use five proxy

indicators to establish whether or not a country’s economy is dependent on a

manufacturing sector vulnerable to competition from emerging East Asian countries

and, hence, likely to be negatively impacted by a strong euro. These five indicators

are: Above EU average percentage of the labor force employed in the manufacturing

industry; below EU average employment in the services industry; below average

share of services in the economy (as percentage of GDP); below average labor

productivity; and, finally, textile specialization. Any country that meets three or

more of the above criteria is classified as being “manufacturing reliant”.6 Of the

Eurozone 12, four member states fall within the manufacturing‐reliant (Greece, Italy,

Portugal and Spain), whereas 11 of 16 countries outside the eurozone meet these

criteria (see Appendix 2 for more details). In the next section, we analyze how

eurozone membership and differences in economic structure condition the effect of

the determinants of euro support.

5. Methods and Results

In order to test the hypotheses concerning support for the euro, we pool the biannual

data for each of the 28 countries (EU 27 plus Turkey) across the period 1999‐2008.7

Both the temporal and spatial properties of this time‐series cross‐sectional (TSCS)

dataset make ordinary least squares problematic (Beck and Katz 1995; Beck 2001;

Plümper et al. 2005). In particular, models for TSCS data often allow for temporally

and spatially correlated errors as well as for panel heteroskedasticity. To address the

serial correlation of the errors in the TSCS framework, we followed the standard

practice of transforming the data (Beck and Katz 1995). We used the Prais‐Winsten

transformation, which assumes that there is a first‐order autocorrelation process,

AR(1), and that the coefficient of the autocorrelation process is common to every

panel (Greene 1993: 456).8 We followed also Beck and Katz’s (1995; 1996)

recommendation of using panel‐corrected standard errors (PCSE) to calculate the

standard errors. Although, in some cases, introducing a lagged dependent variable is

appropriate to account for the autocorrelation process, the number of observations

for each country (t) is sufficiently small to warrant excluding it from our models

(Achen 2000). Moreover, Achen (2000) and Plümper et al. (2005) show that a lagged

dependent variable can introduce biases. We also tested for unit (country)

heterogeneity, and the F‐test indicated that the slopes were homogenous across the

cross‐sectional units, but detected the presence of significant heterogeneity among

6 The classification is based on an average across the entire period 1999‐2008. The five indicators are

highly correlated and our results remain robust if we classify cases according to each of the factors

separately. 7 Data on support for the euro is not available for the entire period for the countries that joined the EU in

2004 and 2007. 8 There are no major differences to the models if we specify a panel‐specific autocorrelation structure.

the units’ intercepts. As a result we estimated a fixed‐effects model that assumes a

separate intercept for each of the countries (Beck 2001).

We estimated three different sets of models. First, we estimate the effect of

our predictors on euro support inside and outside the eurozone (Table 1). Thereafter,

we distinguish between manufacturing‐reliant and service‐oriented economies in

order to assess whether the structure of the economy conditions the effect of the

euro’s exchange rate with the US dollar on support for the single currency (Table 2).

Finally, we examine the effect on euro support of the exchange rate between the

national currency and the euro in countries located outside the eurozone (Table 3).

As hypothesized, Table 1 shows perceptions of economic conditions have

different effects on euro support whether individuals come from countries that are

located inside or outside the eurozone. As expected, higher levels of consumer

confidence lead to higher levels of support for the euro in countries located inside the

eurozone, while it is the opposite in countries that are outside the eurozone. Equally,

higher unemployment has a negative effect within EMU, but a positive effect on

support outside the eurozone, although the effect is only statistically significant

outside the zone. The coefficients for the growth rate have the expected sign but are

not statistically significant. As for inflation, the results are not in accordance with

expectations. For countries located outside the eurozone, the coefficient has the

wrong sign and, more importantly, is not statistically significant. For euro‐area

countries, the coefficient is not only positive but also statistically significant.

Interestingly, Banducci et al. (2009) find no effect of the actual inflation rate on Euro

support within the eurozone in their aggregate‐level analysis, but in their individual‐

level analysis they find that a subjective belief that prices (or inflation) are high leads

to low support for the euro. Survey evidence also show considerable ambivalence

among citizens about changes in price levels, which suggest that inflation rates may

not have the expected impact, because citizens are relatively unaware of actual

inflation rates (Banducci et al. 2009). Overall, in terms of hypotheses H1 and H2, the

evidence generally points in the expected direction, but it is not unequivocal. Finally,

as expected with hypothesis H3, a lower interest rate leads to higher levels of

support for monetary integration within the eurozone.

[INSERT TABLE 1 ABOUT HERE]

In Table 2, it is clearly shown that the effect of the exchange rate between the US

dollar and the euro depends on a countryʹs economic structure. Inside the eurozone,

the effect of a strong euro is only positive and significant in countries with an

economy dominated by services, whereas it is negative (but statistically insignificant)

in countries with economies that rely mainly on manufacturing sectors that are

vulnerable to foreign competition from countries in emerging East Asia. Equally,

outside the eurozone the effect of a strong euro vis‐à‐vis the dollar is very negative

and significant in the manufacturing reliant and exposed economies, but statistically

insignificant in services‐dominant economies. The results in Table 2 thus provide

considerable support for H4 (particularly outside the eurozone) as public support for

the euro declines as the euro appreciates in manufacturing‐reliant countries. H6 is

also corroborated, as support increases as the euro appreciates against the dollar in

service‐oriented countries inside the eurozone. Finally, we find that public support

for the euro increases when diffuse support the European Union is higher (H7).

In Table 3, we can observe that, outside the eurozone, when the national currency

weakens (or depreciates) against the euro (i.e. when one needs more of the national

currency to buy a euro), support for the single currency increases. This result holds

regardless of the economic structure of the country and, as a result, is in line with the

expectation of hypothesis H6. Hence, it confirms the argument that a decline in the

symbolic value of the national currency is associated with a higher level of support

for adopting the euro and entering EMU, independent of the level of the euro’s

exchange rate with the dollar.

In sum, the time‐series cross‐section analyses presented in tables 1 to 3 lend

considerable support to our hypotheses. They suggest that economic indicators, and

notably exchange rates, play an important role in explaining variation in public

support for the euro, even when controlling for diffuse EU support. However, the

effect of economic conditions on support depends on euro membership status,

whereas the effect of exchange rates is mediated by the economic structure. These

results are discussed in further detail in the next section.

6. Discussion

The results presented in the previous section confirm that economic insecurity

matters for euro support. For individuals located inside the eurozone, greater

economic insecurity is generally associated with lower support for the euro whereas

it is the opposite for people residing in countries that are outside the eurozone. The

key factors through which the impact of economic insecurity on euro support

expresses itself are consumer confidence and the exchange rate.

When individuals, as consumers, feel more confident about their country’s

economy, they are inclined to favor the status quo. This is one of the most robust

results obtained from the present analysis. This means that individuals within the

eurozone are more inclined to support the euro when they are more confident about

their national economy while those outside the eurozone prefer to keep the national

currency (i.e. not adopt the euro) when they feel more positive about the state of

their country’s economy. In fact, individuals’ perception of the state of the economy

generally appears to be more important in determining how they feel about the euro

than the objective state of their country’s economy.

Exchange rates matter for individuals’ opinion about the euro, thereby

confirming the results obtained by Banducci et al. (2003; 2009) and Hobolt and

Leblond (2009). The national currency represents a symbol of national identity that

sees its value diminish as it depreciates against the euro, leading people to become

more favorable to adopting the euro as a result. A similar argument can be made

about individuals in eurozone countries whose economic structure is based on

services, though in this case it is naturally the euro’s strength against the US dollar

that matters for the symbolic value that people attribute to the single currency.9 More

importantly for the relationship between economic insecurity and euro support, the

exchange rate between the US dollar and the euro is a highly significant factor in

determining people’s opinion about the euro in “manufacturing‐reliant” countries

located outside the eurozone. For individuals in these countries, a strong euro is

perceived negatively, since it could put their jobs at risk by making the industries in

which they work less competitive against producers located in other emerging

countries where the national currency is pegged to the dollar, like China.

Consequently, they have little inclination to adopt the euro when it is strong. The

same line of argumentation probably also explains why individuals from

manufacturing‐reliant countries outside the eurozone react negatively to higher

inflation and, as a result, become more supportive of the euro. Higher inflation

means higher prices, which potentially means reduced international competitiveness

if productivity does not increase or the currency does not depreciate accordingly. For

individuals residing in manufacturing‐reliant countries located inside the eurozone,

however, the dollar‐euro exchange rate and inflation do not seem to matter with

respect to their perception of the euro.10

In light of the recent economic and financial crisis, these insights about

economic insecurity and the euro allow us to make a number of remarks regarding

the effects of the crisis on Europeans’ opinion regarding the single currency. First, the

rapid decline in EU consumers’ confidence in the economy’s prospects should lead to

a decrease in support for the euro for member states located inside the eurozone

while the opposite should generally hold in countries on the outside. According to

our results, this effect on euro support should be more significant in non‐eurozone

countries than in eurozone ones. This is because the coefficient for the impact of

9 There is also the possibility that a stronger euro is perceived positively by individuals in eurozone

countries where services dominate the economy because it makes imports cheaper for consumers;

private consumption and retailing play an important role in such economies. This alternative utilitarian

explanation is difficult to disentangle from the symbolic one. [check data for EU on consumption and

retailing] 10 Though, if one considers only Mediterranean countries inside the eurozone (Greece, Italy, Portugal

and Spain) and, therefore, excludes Slovenia, the exchange rate between the dollar and the euro

becomes significant both substantively and statistically, i.e. a strong euro leads to a decrease in support.

This is in line with the results in Figure 1a.

consumer confidence on euro support is greater for countries outside the eurozone

for those inside. Unfortunately, the embargo on Eurobarometer surveys conducted

after May 2008 makes it impossible to confirm such informed conjectures about the

impact of the crisis on euro support.

The recent strengthening of the euro vis‐à‐vis the US dollar (see Figure 2),

which occurred mainly as a result of the latter’s loss of value internationally, should

offset the effect of consumer confidence on public opinion regarding the euro. For

instance, because a stronger euro is positively associated with higher support for the

euro in eurozone countries where services dominate the economy, the effect of

reduced consumer confidence on euro support should be mitigated. On the other

hand, in non‐eurozone countries whose economies are reliant on manufacturing, a

stronger euro resulting from the crisis should work against the positive impact that

lower consumer confidence has on individuals’ support for the euro. In the

remaining cases, the euro’s exchange rate should not have any impact on public

opinion vis‐à‐vis the euro, leaving lower consumer confidence to push euro support

downwards or upwards, depending on whether the country is respectively located

inside or outside the eurozone.

Finally, where the crisis has led to a depreciation of national currencies in

non‐eurozone countries, this should favour support for the euro and, thereby, limit

the impact of lower consumer confidence and euro appreciation vis‐à‐vis the dollar

(for manufacturing‐reliant countries).

In sum, the expected impact of the recent economic and financial crisis on

support for the euro is not clear cut. This is because two key factors affecting people’s

opinion about the single currency, lower consumer confidence and higher dollar‐

euro exchange rate, partially offset each other. Furthermore, for countries outside the

eurozone, assuming strong pressures for the national currency to depreciate, the

impact of the crisis on euro support will depend on whether the exchange rate

regime is a fix one or not and, if it is, on whether the monetary authority is able to

prevent a devaluation or not.

7. Conclusion

As mentioned in the introduction, there appears to be a general belief that the 2007‐

2009 financial crisis has made the European single currency more popular. Some

experts such as Jones (2009) go as far as to suggest that without the euro, things

would have been worse than if the old system of fixed exchange rate prevailed. This

is why he writes: “Thus, the eurozone is more likely to get larger than it is to get

smaller” (42). Surprisingly, surveyed Europeans do not share such sanguine views

about the euro in the context of the crisis. As indicated, only a minority of

respondents think that the euro has (or would have) made things better with respect

to the crisis. In order to shed light on this apparent paradox, this paper investigates

the relationship between economic insecurity and public support for the European

single currency.

The overall conclusion is that economic insecurity does negatively affect euro

support. For countries located within the eurozone, greater economic insecurity, as

measured by consumers’ (lower) confidence about the economy’s future prospects, is

generally associated with lower support for the euro, whereas the opposite holds in

non‐eurozone countries. However, a strong euro relative to the US dollar, which

could be an indication of stability, can be a source of economic insecurity, depending

on whether European economies are dominated by manufacturing or services. In the

former case, a stronger euro is likely to mean a loss of competitiveness for

manufacturing sectors that compete against producers in emerging Asian countries

that peg their currencies to the US dollar. In the latter case, a strong euro could

reduce economic insecurity if it means cheaper imported goods, whether for

production or consumption.

Given that the international value of the US dollar is an important (indirect)

determinant of euro support, the continued decline of the dollar could make it more

difficult for political leaders in non‐eurozone, manufacturing‐reliant countries to

convince their populations that adopting the euro is the right thing to do. This means

that it is important for the EU to address the issue of the global imbalances caused in

large part by many East Asian countries (see Cova et al. 2009; Chinn and Ito 2008; The

Economist 2009). For example, the EU should pressure China to allow the yuan (or

renminbi) to appreciate vis‐à‐vis the US dollar as well as discourage her from

abandoning the dollar in favour of the euro when it comes to holding her foreign

reserves. This also means that pushing for the euro to become a global reserve

currency in replacement of the dollar may not be such a good idea if EU leaders want

to maintain or increase euro support in manufacturing‐reliant member states.

Finally, in view of resolving global imbalances, the EU has to make sure that the

Obama administration adopts proper macroeconomic policies (especially fiscal ones)

that will sustain the value of the US dollar internationally.

Although the exchange rate between the euro and the dollar represents a key

element in the relationship between economic insecurity and euro support, it also

plays an important symbolic role whereby, in eurozone countries where services

dominate the economy, the relative strength of the single currency contributes to

pushing people’s support for the euro higher. The difficulty here is to clearly

demarcate between the utilitarian and identity dimensions of the effect of the euro‐

dollar exchange rate on people’s views about the single currency. The results found

herein confirm the importance of the identity dimension for explaining euro support,

since a lower value of the national currency relative to the euro for non‐eurozone

countries leads a larger number of their people to prefer replacing it with the

European single currency.

As Hobolt and Leblond (2009) found when they studied the specific cases of

the Danish and Swedish euro referendums, the present analysis makes clear that the

exchange rate is a major determinant of individuals’ opinion about the European

single currency. Which exchange rate matters and how it does depends on whether a

country is located inside or outside the eurozone and whether its economy is mainly

reliant on manufacturing or services. This means that EU policy‐makers who are

interested in increasing support for the euro, especially in member states outside the

eurozone, and ignore the relative value of the euro as well as that of the national

currency do so at their own peril.

Tables and Figures

Figure 1a: Percentage of respondents in the eurozone who think that the national

currency would have offered better protection against the recent economic crisis

Portugal

Cyprus

Greece

Germany

France

Austria

Belgium

Ireland

Luxembourg

Netherlands

Slovenia

Finland

Slovakia

Source: European Commission (2009), Question QD6a, pp. 35‐36.

Figure 1b: Percentage of respondents outside the eurozone who think that the euro

would have offered better protection against the recent economic crisis

Bulgaria

Lithuania

Czech Rep.

Latvia

Denmark

Sw eden

Estonia

Poland

Romania

Hungary

Source: European Commission (2009), Question QD6b, pp. 37‐38.

Figure 2: Exchange rates between the US dollar and the euro and the Chinese yuan

and the euro, 1999‐2009

USD Yuan

Source: European Central Bank

Figure 3: Support for the euro, 1999‐2008

Note: Eurozone 12: original 11 Eurozone members + Greece; Newcomers: Cyprus, Malta, Slovakia,

Slovenia; Euro outsiders: Denmark, Sweden, UK; Euro hopefuls: remaining non‐Eurozone member states +

Turkey.

Table 1: Support for the euro inside and outside the eurozone (1999‐2008)

Eurozone Outside Eurozone

Coef. PCSE Coef. PCSE

EU membership a good thing 0.36*** 0.03 0.57*** 0.07

USD-Euro exchange rate 7.07** 3.29 -7.32 5.89

Inflation 1.00** 0.47 -0.24 0.21

Unemployment -0.19 0.17 0.72*** 0.24

Consumer confidence 0.13*** 0.04 -0.28*** 0.064

Growth 0.06 0.14 -0.12 0.23

Interest rate -1.94*** 0.50 -0.18 0.19

Constant 47.19*** 5.07 29.85*** 8.33

N 247 221

Countries 15 16

R squared 0.69 0.64

Rho 0.71 0.52 Note: The fixed-effects models were estimated using a Prais-Winsten regression, allowing for autocorrelation in the error terms over one period (AR1), and the reported standard errors are panel-corrected (PCSE). ***p<0.01; **p<0.05; *p<0.1

Table 2: Euro support and economic structure (1999‐2008)

Eurozone Outside Eurozone

Services Manufacturing Services Manufacturing

Coef. PCSE Coef. PCSE Coef. PCSE Coef. PCSE

EU membership a good thing 0.33*** 0.03 0.31*** 0.07 0.61*** 0.09 0.41*** 0.06

USD-Euro exchange rate 13.39*** 1.57 -6.51 6.16 -3.98 6.48 -22.78*** 7.27

Inflation 1.36*** 0.28 0.45 1.18 -1.02 0.90 -0.62*** 0.20

Unemployment -0.39* 0.22 0.17 0.59 0.33 0.85 -0.39 0.27

Consumer confidence 0.10*** 0.03 0.17* 0.09 -0.25*** 0.06 -0.26*** 0.07

Growth 0.12 0.12 0.01 0.67 -0.66 0.46 -0.76*** 0.26

Interest rates -2.76*** 0.36 0.10 0.81 -1.63 1.11 -0.03 0.15

Constant 44.59*** 3.36 57.88*** 10.74 28.78** 11.90 76.44*** 11.38

N 172 75 81 140

Countries 10 5 5 11

R squared 0.69 0.72 0.64 0.76

Rho 0.70 0.67 0.53 0.50

Note: The fixed-effects models were estimated using a Prais-Winsten regression, allowing for autocorrelation in the error terms over one period (AR1),and the reported standard errors are panel-corrected (PCSE). ***p<0.01; **p<0.05; *p<0.1

Table 3: Euro support and strength of the national currency outside the Eurozone

Service Manufacturing

Coef. PCSE Coef. PCSE Coef. PCSE Coef. PCSE

EU membership a good thing 0.65*** 0.09 0.68*** 0.08 0.44*** 0.06 0.42*** 0.063

National currency-euro exchange rate

4.12** 2.16 4.42** 5.70 2.99*** 0.52 2.40*** 0.51

USD-euro exchange rate - - -5.39 2.07 - - -19.57*** 6.77

Inflation -1.11 0.99 -1.18 0.96 -0.29 0.21 -0.38* 0.20

Unemployment 0.60 0.77 0.67 0.75 0.38 0.31 -0.05 0.26

Consumer confidence -0.39*** 0.10 -0.41*** 0.09 -0.20** 0.08 -0.21*** 0.07

Growth -0.67 0.52 -0.59 0.51 -0.36 0.28 -0.48* 0.26

Interest rates -0.77 1.17 -0.64 1.10 -0.03 0.16 -0.07 0.16

Constant 11.68 11.05 15.25 12.00 28.08*** 5.00 60.49*** 10.99

N 81 81 140 140

Countries 5 5 11 11

R squared 0.68 0.69 0.68 0.73

Rho 0.39 0.39 0.43 0.45 Note: The fixed-effects models were estimated using a Prais-Winsten regression, allowing for autocorrelation in the error terms over one period (AR1),and the reported standard errors are panel-corrected (PCSE). ***p<0.01; **p<0.05; *p<0.1

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APPENDIX 1: Data sources and descriptions

Support for the euro

Eurobarometer surveys EB51, EB52, EB53, EB54.1, EB55.1, EB56.2, EB57.1, EB59,

EB59.1, EB60.1, EB61, EB62, EB63.4, EB64.2, EB65.2, EB66.1, EB67.2, EB68.1, EB69.2

Support for EU membership

Eurobarometer surveys: EB510, EB520, EB530, EB541, EB551, EB562, EB571, EB61,

EB62, EB622, EB634, EB642, EB652, EB672, EB681, EB692

USD‐Euro exchange rate

European Central Bank

National currency‐euro exchange rates

European Central Bank: Bulgaria, Denmark, Estonia, Czech Republic, Hungaria,

Latvia, Lithuania, Poland, Romania, Sweden, Turkey, United Kingdom,

Central Bank of Malta: Greece, Slovakia, Slovenia, Malta, Cyprus

Inflation

Eurostat: Annual rate of change in Harmonized Index of Consumer Prices (HCIP)

Unemployment

Economist Intelligence Unit, Eurostat, OECD, Turkish Statistical Institute

Consumer confidence

Eurostat, OECD, Central Bank of Turkey

Economic growth

Eurostat, OECD: Quarterly GDP (expenditure approach) growth rate compared to

the same quarter of previous year, seasonally adjusted

Interest rate

Economist Intelligence Unit, Eurostat, IMF (IFS), OECD: monthly average of day‐to‐

day money market rates

APPENDIX 2: Manufacturing reliance and vulnerability

Eurozone member (in 2002)

Employment in industry, % of total

Employment in service, % of total

Services as % of

Labor productivity

Textile & Clothing

specialisation

Manufacturing reliance &

vulnerability

Austria Yes 29 65 44 117 No No Belgium Yes 26 72 52 132 Yes No Bulgaria No 30 51 36 33 Yes Yes Cyprus No 24 70 48 84 No No Czech Rep. No 40 56 33 67 No Yes Denmark No 24 72 50 106 No No Estonia No 33 60 40 55 Yes Yes Finland Yes 26 68 42 111 No No France Yes 25 71 57 123 No No Germany Yes 32 66 51 108 No No Greece Yes 23 61 42 99 Yes Yes Hungary No 34 60 44 70 No Yes Ireland Yes 28 64 42 133 No No Italy Yes 32 63 47 116 Yes Yes Latvia No 26 59 40 45 Yes Yes Lithuania No 28 55 32 51 Yes Yes Luxembourg Yes 22 76 61 169 No No Malta No 24 63 44 91 No No Netherlands Yes 20 73 51 113 No No Poland No 30 52 37 58 No Yes Portugal Yes 33 55 47 69 Yes Yes Romania No 29 34 29 37 Yes Yes Slovakia No 38 56 34 66 No Yes Slovenia No 37 52 41 80 Yes Yes Spain Yes 31 61 42 103 No Yes Sweden No 23 74 51 111 No No Turkey No 23 41 27 55 Yes Yes UK No 24 74 52 112 No No

EU 27 average 28 62 50 100 Note: The manufacturing sensitivity dummy is allocated to countries that have a score above the

EU average in terms on the sensitivity of its manufacturing industry on at least 3 of the 5 indicators:

Employment in industry (above 28%); Employment in services (below 62%); Service as % of GDP

(below 50%); Labor productivity (below 100); Textile specialisation (yes)

Sources: Eurostat, World Development Indicators (World Bank)

Economic Insecurity and Support for the Euro

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