EUROPEAN ECONOMIC AND MONETARY UNION AND THE OPTIMUM CURRENCY AREA THEORY (Critical notes on their presentation by Paul Krugman and Maurice Obstfeld)

Mikhail Raev

Yearbook of the Faculty of Economics and Business Administration, Sofia University, 2022, vol. 21, issue 1, 171-187

Abstract: The article explores how Paul Krugman and Maurice Obstfeld present the establishment and development of the European Economic and Monetary Union (EMU) and the optimum currency area (OCA) theory and criteria in their widely acclaimed textbook International Economics: Theory and Policy. The author examines Krugman and Obstfeld's assessment of OCA criteria such as mobility of the production factors – capital and labor. It enabled them to argue that EMU is not an OCA by comparison with the US. Drawing upon a plethora of recent surveys on these two criteria, the author argues that EMU is indeed an OCA. European economic integration never attempted to satisfy these criteria, however: its creators saw it in terms of customs union at least a decade before Mundell's groundbreaking articulation of OCA theory. While, on the one hand, this theory is irrelevant to EMU assessments, on the other, Krugman and Obstfeld do not apply it consistently. The first editions of their work state that 'An optimum occurs when the marginal gain from greater exchange-rate predictability just equals the marginal loss due to reduced economic stability': later ones abandon this. The author proposes that any optimum reached by a currency area should be assessed on its own merits intertemporarily, rather than by comparison with another currency area. Not only do both areas' points of optimality vary, but they also reach different optimality levels either hindered or facilitated by a number of factors like legal systems, language barriers, and transportation connectivity.

Keywords: optimum currency area; economic and monetary union; P. Krugman; R. Mundell; international economics. (search for similar items in EconPapers)
Date: 2022
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