On the 1st of January 1999, 11 European countries adopted the Euro as their official currency. A new Economic and Monetary Union with more than 300 million citizens was born. Sharing a common currency offers several advantages for countries, firms and citizens like enhanced cross-border trade, a better price transparency or the disappearance of foreign exchange rate risks. However, a Monetary Union also comes with constraints like the loss of exchange rate regime of its members which is an important instrument to fight adverse shocks. In order to minimize economic risks for its members and to foster the economic stability of the future European EMU, the European Union member states agreed to meet the Euro Convergence Criteria as a requirement to adopt the Euro. During the negotiations about the necessary criterion, the theory of Optimal Currency Areas – a theory which has its origin in the Bretton Woods era – was deliberately reincarnated by economists to verify whether or not the Eurozone can become a successful EMU. Until today the (traditional) OCA theory is often used by the literature and also by politicians to evince fundamental flaws of the Eurozone.
This assignment investigates the Eurozone in the light of the theory of Optimal Currency Areas. In the first part of this assignment the main contributors to the theory of Optimal Currency Areas are enumerated and its most significant factors are explained. The second part applies the listed factors to the Eurozone in order to determine whether or not a specific criterion is fulfilled by the European EMU. A summary and conclusion complete this essay.
Inhaltsverzeichnis (Table of Contents)
- Abstract
- Table of contents
- List of Abbreviations
- List of Figures
- Introduction
- Objectives
- OCA theory: Insights and important criterions
- The Euro Zone in the light of the OCA theory
- High mobility of factor labor
- Degree of openness
- Diversification in production and consumption
- Price and wage flexibility
- Similarity of inflation rates
- Fiscal transfers
- Financial integration
- Conclusion
- List of references
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This assignment investigates the Eurozone in the light of the theory of Optimal Currency Areas, examining its main contributors and its most significant factors. The analysis applies these factors to the Eurozone to determine whether specific criteria are met by the European EMU. The essay aims to provide a comprehensive overview of the Eurozone and its compliance with the principles of Optimal Currency Areas.
- The theory of Optimal Currency Areas and its key contributors.
- The application of OCA theory to the Eurozone.
- The analysis of the Eurozone's compliance with specific OCA criteria.
- The potential advantages and disadvantages of a shared currency in the Eurozone.
- The economic implications of the Eurozone in the context of OCA theory.
Zusammenfassung der Kapitel (Chapter Summaries)
The first part of the assignment introduces the theory of Optimal Currency Areas (OCA) and its main contributors. The second part delves into the application of the theory to the Eurozone, analyzing specific factors like labor mobility, openness, diversification, price flexibility, inflation rates, fiscal transfers, and financial integration. The analysis evaluates the Eurozone's adherence to these criteria and discusses the potential consequences of its compliance or non-compliance with the principles of OCA theory.
Schlüsselwörter (Keywords)
The main keywords and focus topics of the text include the Eurozone, Optimal Currency Areas (OCA) theory, economic and monetary union (EMU), labor mobility, openness, diversification, price and wage flexibility, inflation rates, fiscal transfers, financial integration, and the Euro Convergence Criteria.
- Quote paper
- Thorsten Mannherz (Author), 2016, The Theory of Optimal Currency Areas. Pros and Cons of the Eurozone, Munich, GRIN Verlag, https://www.grin.com/document/377616
