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Asses the Claim that the Countries Using thr Euro Constitute an Optimal Currency Area - Essay Example

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An optimum currency area is a geographical region where it would be economically most efficient to have single currency. This paper will therefore argue that countries constituting the Eurozone and using Euro as a single currency is not an optimal currency area. …
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Asses the Claim that the Countries Using thr Euro Constitute an Optimal Currency Area
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Asses the Claim that the Countries Using thr Euro Constitute an Optimal Currency Area

Download file to see previous pages... This paper approves that Euro was considered as a stable currency before the late 2000s when economic crisis started to happen. The current sovereign crisis wherein many European countries are finding it relatively difficult to pay off their obligations on time therefore has created strong doubts over the sovereign debt crisis. Greece specially faced critical challenges in terms of paying off its debts and resultantly this has created strong pressure on Euro to decline against US Dollar in international market. This has also suggested that the Euro may not be an optimal currency region if it continues to perform in its current form.
This suggests the absence of physical restrictions to travel and facilitate the free movement of the labor across the borders. It also requires the low cultural barriers as well as the institutional arrangements make it relatively easier for the labor to move freely. Labor mobility therefore is considered as a hedge against the adverse shocks when exchange rates are fixed or cannot be adjusted easily. It has been observed that the labor mobility within Euro area is relatively low as compared to the countries like US and Japan.
This report makes a conclusion that Euro has to fulfill four important criteria before it can form into one of the cohesive and efficient single currency areas in the world. Apart from free capital mobility all other criteria suggest that the countries in the region may not be ready and hence countries comprising of the region where Euro is the single currency may not be constituted as an optimal currency area....
two models are based upon the concepts of stationary expectations as well as the International Risk Sharing.( Kenen, 1969) One of the key attribute of an optimal currency region therefore is based on the fact that it is often larger than a single country. The creation of Euro has been considered as an engineered attempt to provide a case study to test the theory of how to create an optimal currency region as individual countries in the region may not have been sufficient enough to form an optimal currency area. History of Euro Euro is the single currency in Eurozone comprising of the 17 of the 27 countries in the European Union area. Officially launched in late 1990s, over the period of time, Euro has become one of the most dominating currencies in the world. At the start of Euro as a currency, it was widely expected that the Euro will replace US Dollar as the most traded currency in the world. Backed up by the economic powers of the European economic powers in order to ensure that region is served by a single currency.( Richard; & Wyplosz, 2004.) Euro is officially administrated by the European Central Bank and the Eurosystem whereas the ECB has the sole responsibility to set the setting up the monetary policy for the region whereas the Eurosystem has the mandate of printing and minting currency notes as well as coins. Euro and Optimal Currency Area As discussed above, Euro was considered as a stable currency before the late 2000s when economic crisis started to happen. The current sovereign crisis wherein many European countries are finding it relatively difficult to pay off their obligations on time therefore has created strong doubts over the sovereign debt crisis. Greece specially faced critical challenges in terms of paying off its debts and resultantly this has ...Download file to see next pagesRead More
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