In the following paper, we make use of one of the chapters of our textbook, which focuses on Optimum Currency Areas in relation to Europe. After perusing the information thus provided, we found related articles that would provide us with significant information that would allow us to compile an enlightening case study; comparing the Optimum Currency Area we presently live in with the Euro-Zone.
In most secondary sources, we found that the Euro-Zone is not considered an Optimum Currency Area, for the reasons we take up below. The information gathered from different online journals allows us to give you a concise look at what Europe could do in order that they be considered an Optimum Currency Area.
Commencing our analysis of the Euro-zone as an Optimum Currency Area (OCA) is the definition of this phenomenon. An OCA consists of a group of countries whose use of one currency gives rise to no loss of welfare. It is based on many factors and also has its advantages and disadvantages. In order to identify an OCA one can look at:
1)The relation between the monetary efficiency gains for the joining country and the degree of economic integration between the joining country and the single currency area.
2)The relationship between the economic stability loss for the joining country and the degree of integration between that country and the single currency area.
Tags: Optimum Currency Areas, monetary efficiency gains, economic integration, Euro-Zone.
[...] At the time of this study, however, the EU countries were trading at ten to twenty percent of their Gross Domestic Product, which was larger than trade between the United States and themselves. Therefore, it is vital that they increase trade among themselves. SHOCK VOLATILITY the ability to adjust quickly to shocks proves the existence of a mobilized labor force. Being able to adjust quickly is not the only factor we must look at, however. We must also take notice of whether these shocks are symmetric or asymmetric; meaning if they affect all to the same degree or if it affects some more than others, the reason being that if they are asymmetric more attention must be paid to the area(s) that is (are) most affected. [...]
[...] However, one must not assign blame exclusively to monetary policy and must also keep in mind that liberalization of the factor markets and minimal differences in fiscal legislation will augment market openness and positively affect factor mobility, inflation rates, and financial integration. The characteristics discussed all suggest that the EU has a long way to go before it is officially considered an OCA. One must not dismiss the fact however that the member countries of the EMU have been progressing in their efforts to become an official OCA. There is evidence that investments are [...]
[...] The ability of a single currency area to adjust to these shocks rapidly, it shows the presence of labor mobility allowing us to say whether or not the area is an OCA, based on the results of the other assessments done on the remaining characteristics. COMPARING THE UNITED STATES TO THE EUROPEAN UNION In order to compare these two amalgams of countries, we must return to the characteristics and costs and benefits previously explained and examine how they performed in each. [...]
[...] The above information proves our belief and the belief of the authors of our research accurate in say that the European Monetary Union is not an OCA as the United States is. RECOMMENDATIONS FOR THE EMU In recommending ways the European Union can change their policies so they can be recognized as an OCA, we return to the characteristics and categories compared discussed earlier. As we have discussed, the costs associated with an OCA depend on whether or not shocks are symmetric or asymmetric and if when they occur they are easily absorbed. [...]
[...] LOSS OF ECONOMIC STABILITY/LEVEL OF INTEGRATION (LL SCHEDULE) Analyzing the relationship between loss of economic stability of the joining country and the level of integration enjoyed by the joining country and the union, one can see that when this relationship is negative, it is favorable for the country to join the union. What must be stated here, however, is that the two characteristics aforementioned must work together in determining whether or not an area is an OCA or not. In order to do this we graph them (shown below) and by looking at the graph we can see that an OCA would be an area in which all the countries involved would meet either at the intersection of the graph or east of that intersection. [...]
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