OPTIMUM CURRENCY AREAS AND THE EUROPEAN EXPERIENCE

Optimum Currency Areas and the European Experience

Optimum Currency Area

Analyze the theory of 'Optimum currency areas' and assess its relevance to the Euro-area.

Optimum Currency Area

The optimum currency area (OCA) theory examines the conditions under which the waiver on the exchange rate as an adjustment instrument to exogenous shocks within a common currency area, which are explained in more detail later, may prove to be acceptable and also to be beneficial.

Generally a currency area is a geographical area in which a single currency is accepted. This area may be confined to one country or several countries include. If the area covers several countries, there is a monetary union, such as the European Economic and Monetary Union (EMU).

The four main criteria for a successful monetary terminal are:

Labor mobility across the region

This includes physical ability (Visa, rights of workers, etc.), lack of cultural barriers to free movement to travel (such as different languages), and institutional arrangements on (like the ability to have superannuation placed throughout the region). (Frankel, 2001, pp. 1009-1025) In the case of the euro zone, while capital is quite mobile, labor mobility is relatively low, especially when compared with U.S. and Japan.

Product diversification

The euro-zone scores quite well on this criterion and the financial integration seems to improve the diversification of production structures.

Openness with the main mobility and price and wage flexibility over the region

Openness of economy works as markets forces of supply and demand automatically distributes goods to money, where they are needed. In practice, this does not work perfectly, as there is no appropriate wage flexibility. The euro-zone members to act hard with each other (intra-European trade is greater than between states is trading), and most new empirical analysis of the "Euro effect" suggest that the single currency has increased trade by 5 to 15 percent in the euro zone, if they trade between non-euro countries is compared. (Frankel, 2001, pp. 1009-1025)

An automatic tax

An automatic tax brings unity to the areas / sectors to redistribute money, the first two properties have been affected by disadvantageous. This normally takes the form of tax redistribution to less developed areas of a country or region. This policy, though accepted in theory is to introduce politically difficult, as the better-off regions rarely give up their income slightly.

In theory, Europe does not guarantee clause in the Stability and Growth Pact are to mean that fiscal transfers are not allowed, but it is impossible to know what happens in practice.

Relevance of theory with euro zone

The fact that the legislative body known as Economic and Monetary Union formed by the member countries of the euro area meets the criteria for the establishment of a monetary union is often questioned. In particular, the mobility of workers between member countries and wage flexibility are low. There is no real compulsion to harmonize economic policies pursued by different countries. (Coy, 1999) The budget for the EU administration, very low, is not able to provide significant monetary ...