Is Europe an Optimum Currency Area - Dissertation Example

?Methodology Scope of the study The research paper aims at analyzing the condition of Europe as a continent and the standard of Euro as a currency. The paper makes an effort to analyze the effect of Euro as a common currency in the European continent. The research paper also makes an effort to study the effect of the countries including Spain, Portugal, Greece and Estonia on the currency Euro. The research paper tries to answer the question like how the weaker countries are affecting the stronger economical countries. How can it be defined to keep the weaker economical countries in the euro zone? And what are the pros and cons of adopting the old currency in the continent? The scope of the study will involve a thorough reading of the previous works on Europe and Euro as a currency and also about its currency, which will help in analyzing Europe as a continent and Euro as a currency. The study will also include the thorough reading of the Mundell theories that are available on Europe, which will further determine the opinion of the Colombia Professors. The stationary expectation of the Mundell theories has been used to examine Europe as a currency area. The research questions of how the stronger countries are affecting the weaker countries can be analyzed with the help of certain parameters like Labor mobility across the region, Openness with capital mobility and price and wage flexibility across the region, production diversification, homogenous preferences, commonality of destiny, participant countries have similar business cycles can be examined. Whether Europe is a currency area or not can also be analyzed on the basis of the aforesaid parameters. This would further help in analyzing the effect of the currency on the continent and its countries. Research Technique The research paper has adopted the secondary research technique, which included a comprehensive literature survey on the previous studies made on Europe and Euro. The study included a thorough understanding and analyzing of the books on “The currency Of Ideas: Monetary Politics in the European Union” by Kathleen Mc Namara, “Optimum Currency Areas and the European Experience” by Ronald McKinnon, “A theory of optimum currency areas” and “Uncommon Arguments for common currencies” by Robert Mundell. The study also includes referring and considering works of Asta Vasiliauskaite and Mindaugus Vitakauskas.  A research paper involves the collection of information from external sources and thereby analyzing it by using statistical analysis and other tools. Thus the task of the researcher is to assemble information from reliable sources and integrate and analyze it. Here the method adopted is secondary research method, which includes the usage of the relevant information, and data that are available. This approach takes into account the data, which has been already collected by someone else. The research paper base its work on the secondary research as Primary Research is an expensive and time consuming method which requires the researcher to collect the data himself or herself. Primary research also tends to constrain the data and the chance of misinterpreting the data also arises in the primary research. Owing to the disadvantages of the primary research, the paper adopts the secondary method of data assembling which is much more cost effective and not at all time consuming and in the era of Information and communication technology revolution getting access of the data or information on the internet is not at all difficult. (Primary and Secondary research, n. d) An article on “Is Europe an optimum currency area?” takes a mixed approach where the paper is based on certain parameters like Asymmetric shock, openness, diversification and trade dissimilarity, labor mobility, the effects of asymmetric shocks, fiscal transfers, homogenous preferences, commonality of destiny versus nationalism. This is an approach based on the study undertaken by Robert Mundell, which emphasizes on the fact that labor mobility will ensure more resistance to shock. According to him the optimum currency area should be the one where people can move easily and freely within the countries (“Is Europe an optimum currency area?”) Another paper on “Why European Union is not an optimal currency area: the limits of integration” by Yuceol, talks about the integration of the sectors across the countries in the continent and talks about limitations of the integration and hence is not very optimistic about the European nation being and optimal currency area. The study is based on quantitative time series analysis based on the 12 ERM (European Exchange Rate Mechanism) countries and the five convergence criteria, one of which is the unemployment rate. The paper mentions the homogeneity of preferences will also help in Europe becoming an optimal area (Yuceol, n. d). However the data used here is till 1999 (latest) and hence will not be valid today since many other nations have joined the Union since then. The analysis undertaken in the research paper will be done on the basis of the quantitative and qualitative analysis. The qualitative analysis would include the study and analyzing the previous works that are available on the related topic. Qualitative research involves the collection of the in depth information about any subject. This methodology involves the study of various empirical materials and case studies that are relevant to the subject. To examine whether Europe is an optimum currency area, certain parameters have been used like the labor mobility across the region, openness with the capital mobility and price and wage flexibility across the region, similar business cycles of the participants cycles, production diversification would involve quantitative analysis and homogenous preferences which would include a qualitative analysis. (Qualitative versus Quantitative Research: Key points in the classic debate, n. d) The research paper undertaken here makes an effort to combine the approaches taken by Mundell and MC Kinnon.  It takes into account all the factors like labor mobility the original criteria cited down by Mundell and openness of McKinnon and others factors like product diversification and homogenous preferences in the study. The previous studies made on whether Europe is an optimum currency area used parameters like asymmetric shock, which measures the impact of shocks on GDP and prices. If all the countries gets a similar response or identical response then it can be concluded that the countries can take the Euro as an optimal currency but the method is heavily biased as it might happen that during the banking crisis like in the early 1990’s countries like Finland and Denmark has already undergone a period of asymmetric severe shock. Hence the parameter labor mobility across the region has been considered which is an original Mundell criterion. Labor mobility can counteract the impacts of the asymmetric shock where there is no scope of changing the exchange rate or any adjustments. Lower labor mobility implies greater adjustment cost. The trend of the labor mobility is observed in the European continent as compared to that of United States. (Is Europe an optimum currency area, n. d, p. 13) The criteria openness has been chosen to compare its effect with the net benefit components. The proportionality of the openness with the trade shocks and the monetary shocks are measured and is used to measure the net benefits. The positive and the negative correlation of the monetary shocks are also taken into account. The correlation between the openness and the capital mobility has also been considered. The presence of wage flexibility is also measured. The trend will be observed and a greater openness will imply the need for a monetary union. The McKinnon criterion of openness which states that a country open to trade form an optimum currency area. Hence the research paper takes into account the statistical data to examine whether Europe is trade open country or not. (Ricci, 1997, p. 33; McKinnon, 2001, p. 2) The research paper takes into account whether the European nations have homogenous preferences and act in similar way to resist the shocks. The qualitative analysis of the policies taken by the European nations would help in analyzing the fact whether the countries should go for a union currency (Optimum Currency Areas, n. d, p. 17). Product Diversification is also used in examining the fact whether Europe is an optimum area. While doing the analysis it has to be observed and examined the product diversification in the European continent. A distinction has to be made with the help of the empirical data between the greater horizontal and vertical production, as vertical production of the goods is not associated with the symmetry of shocks. (Horvath, 2003, p.28) Data Source and Collection The books and journals have been considered for the research paper, which includes works of Mundell, McKinnon and others. Some online journals have been also considered. For the quantitative analysis part the empirical data of the European nations have been considered like the statistical data of the labor mobility among the nations. Some authentic websites has also been considered in the process of data collection. Certain government websites has been also taken into account to get the overview of the public policies in combating the shock. Reliability and validity The data collected are reliable and authentic, as they have been taken either consulting authentic journals or books and authentic websites. The research paper has avoided the use of any Internet sites, which are not authentic like online blogs and forums. Sites like Wikipedia and other similar sites, which claim to be an online encyclopedia, have not been consulted while undertaking the study. Academic journals and authentic e- books have been only considered. On line blogs, which provides information, has been avoided so as to arrive at an authentic and reliable conclusion or inference.  These sites are generally avoided in any research work as they sometimes contain biased and unfair data and information.   Limitations and Future Scope of Study The method employed is secondary research method, which has some problems like bias. The data used in this method is not always for the purpose of the research hence sometimes inconsistency of the data is faced. Considering Euro as an optimal is a current issue, which has further scope of study.  Topics like future European integration and Product diversification can be taken separately for studying as a major factor for examining whether Europe can be considered as optimal currency area. The topic of labor mobility can be taken up separately to study how it will affect the optimality of the European currency Euro. This also gives the scope of further studies in comparing the optimal currency conditions in United States and European nations.   One can also take an initiative to study the factors individually that keeps Europe from becoming an optimal currency area thereby analyzing the factors with greater depth and recommending some measures, which will enable the continent to become a currency optimal area.                    References: 1. Is Europe an optimum currency area?, (n. d), available at: http://www.econ.ku.dk/okombe/intmonecon/slidesch13part2.pdf (accessed on May 28, 2011) 2. Ricci, L (1997), A model of an optimum currency area, International Monetary  Fund-Research Department, available at: http://www.imf.org/external/pubs/ft/wp/wp9776.pdf (accessed on May 28, 2011) 3. Optimum Currency areas, (n. d), available at: http://xa.yimg.com/kq/groups/18812718/293244388/name/Baldwin (accessed on May 28, 2011) 4. Horvath, J. (2003), Optimum Currency area theory: A selective review, BOFIT, No. 15, available at: http://www.carloscuerpo.com/wp-content/uploads/2010/05/OCA_3.pdf (accessed on May 28, 2011) 5. Yuceol, H. (n. d), Why European Union Is not an optimal Currency area: The limits of integration” available : http://www.eab.ege.edu.tr/pdf/6_2/C6-S2-M6.pdf (accessed on May 28, 2011) 6. Primary and Secondary research, (n. d), Available at: http://www4.caes.hku.hk/acadgrammar/report/resproc/research.htm (accessed on May 27, 2011) 7. Qualitative versus Quantitative Research: Key points in the classic debate,  (n. d), available at: http://wilderdom.com/research/QualitativeVersusQuantitativeResearch.html (accessed on May 27, 2011) 8. McKinnon, R. (2001) Optimum Currency Areas and the European Experience, available at: http://www.stanford.edu/~mckinnon/papers/optimumreveur.pdf (accessed on May 28, 2011) Read More