An Optimum Currency Crisis

Paolo Pasimeni

MPRA Paper from University Library of Munich, Germany

Abstract: This paper presents an ex-post assessment of the current situation of the Economic and Monetary Union (EMU) in light of the conditions prescribed by the theory of Optimum Currency Areas (OCA). The analysis shows that those conditions were satisfied at very different degrees. Factors mobility has clearly increased since the inception of the Eurozone, with an important difference between free movement of capital, which can be considered as fully accomplished, and labour mobility, which has improved, but to a lower degree. Prices and wages flexibility was initially lower compared to other regions, like the US, but has improved over time. The similarity of business cycles among different economies joining the euro was a condition not respected at the beginning, which probably led to sustained imbalances within the Eurozone. Finally, fiscal union was the main missing element of the initial construction of the Eurozone, and still is. The common budget is so exiguous that its effectiveness as shock absorption mechanism is negligible. The analysis then shows how some of the concerns raised on the eve of the euro did actually materialize, even if not immediately. First, in its first decade the Eurozone did not experience major turbulences, because growing financial integration was compensating the need for fiscal transfers, through the private insurance channel. Second, once the long-feared shock hit, the mechanism proved weak and non-resilient. The inherent weaknesses of the EMU became evident. Third, as it had been foreseen, the cost of the adjustment after the shock fell mainly on labour, with much higher and longer unemployment in the Eurozone than both non-Eurozone EU and the US. Fourth, as the theory suggested, the lack of common mechanisms of adjustment dramatically increased socio-economic divergences within the EMU.

Keywords: EMU; Optimum Currency Areas; Socio-economic Divergences; Fiscal Union; Political Union. (search for similar items in EconPapers)
JEL-codes: B22 E61 F15 F33 (search for similar items in EconPapers)
Date: 2013-11-24
New Economics Papers: this item is included in nep-mac
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Journal Article: An Optimum Currency Crisis (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:53506

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