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Europe as an Optimal Currency Area - Essay Example

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[Professor Name] [Course Number] [Professor Name] [Date] Europe as Optimum Currency Area The term optimum currency area refers to the economic unit that comprises of regions affected symmetrically by the disturbance. The labour and other factors of production are also supposed to move quite freely between the regions within that economic unit…
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Europe as an Optimal Currency Area
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Europe as an Optimal Currency Area

Download file to see previous pages... The debate about Europe as optimum currency area as an important and heated point of discussion for the economic experts and analysts and there have been different standpoints presented by the experts to regard and disregard Europe as optimum currency area. The main elements identified within the definition of optimum currency area could effectively work to decide if any region could be regarded as optimum currency area or not. Likewise, Europe could also be evaluated as an optimum currency area by looking at some specific criteria like asymmetric shocks, degree of openness, international factor mobility, labour mobility, fiscal transfer, product diversification and trade and business cycles similarities etc. (Krugman and Obsrfeld, p98) The economy and labour market of Europe has been analysed by the experts from these perspective very frequently and most of the analysis and observations have concluded with the results that Europe could not be regarded as an optimum currency area because it does not completely complies with the criteria set for the OCA. However, it is also a fact that most of the economic experts and analysts believe that Europe has great potential to become an OCA and in coming few years the situation would be evolved where Europe will head to appear as an OCA (McKinnon, p173). The experts arguing against the status of Europe as OCA put forward the evidences in support of their stance. It is found that free mobility of labour within the regions of Europe is not high. The labour mobility in Europe has been recorded one third of the mobility found in United States. It implies that Europe lag behind in proving itself as area of free labour mobility. Similarly it is also found that Europe is yet to establish system for extensive and automotive intra-European fiscal transfers and currently there are not enough fiscal transfers between the European countries that it could be regarded as OCA. The existence of common currency is also an important characteristic of optimum currency area. It is imperative that the OCA should have one central bank to manage all the monitory policies in the region and the member countries use to follow the same policy as formulated and implemented by the central bank of the region. There should be single currency with fixed exchange rate system. The launch of Euro is often cited as an evidence to prove Europe as OCA however, it is also a fact that despite the use of common currency the European countries yet to have common monitory policies and they need more time to create common fiscal and monitory policies like that of an OCA (Tavlas, p211). The degree of commodities' market integration within the union members also determines the optimum currency area. In Europe, there are some countries like Britain where there is higher level of reliance upon the export of high technology commodities whereas there is also large proportion of owner occupiers in the country links with the variable interest rates (Tavlas, p211). It implies that the market integration does not take place in similar production strategies among the members of the union but there are differences in the exports and import patterns of the countries. This trend also evident that Europe is ...Download file to see next pagesRead More
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