Optimum Currency Area

Optimum Currency Area in Europe

Description of Optimum currency area

The Concise Encyclopedia of the European Union describes optimum currency area in the following terms: [1] An area covering two or more homogeneous economies, where the advantages of having a single currency outweigh the disadvantages. The most important pre-conditions are that the economies should be similarly affected by external shocks and that they should be reasonably well synchronised with each other (see more in this European encyclopedia). The UK and Germany are often said not to constitute an optimum currency zone, due to the structural differences in their economies. For instance, the UK trades and invests predominantly in dollars; the British business cycle is more in tune with the US cycle than with the German one; and Germany is less sensitive than the UK to movements in short-term interest rates and stock markets.

US experience suggests that labour mobility and automatic fiscal transfers are also preconditions of a successful currency zone, without which regions of intractable unemployment may develop. During California’s recession of 1991-4 1.2 million Californians emigrated to other states and its contribution to the total federal tax revenue fell to 8% from 17% in the preceding four boom years. This type of adjustment can occur in Europe on a limited scale within the larger individual countries, but the EU as a whole lacks an integrated tax and benefits system and intercountry labour mobility is low. (See also MacDougall Report.)

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Notas y References

  1. Based on the book “A Concise Encyclopedia of the European Union from Aachen to Zollverein”, by Rodney Leach (Profile Books; London)

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