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Does the European Union constitute an optimal monetary area today?

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  1. Introduction
  2. The Mosaic of identities
    1. Punjabi
    2. The Sindhis
    3. Mohajirs
    4. Pathan and Baluchi minorities
    5. Kashmiris
  3. The political construction of national identity
    1. The notion of national identity
    2. Pakistani Muslim identity or identities ?
    3. Language:Unifying or divisive ?
    4. Foreign policy and national identity
  4. Conclusion

Developed by R. Mundell in 1961, the concept of optimum currency area aims at defining the necessary conditions in interest of the entire country to give up their financial independence in favor of a single currency.This concept first emerged as an innovative concept in an environment where discussions focused more on the superiority of regimes on fixed exchange rates or flexible as per the existence of national or supranational currencies.

It was of great help in debate before the creation of the EMU. A few decades later, it led to convincing results. Does this concept still have its place in Europe with 27? The theory of optimum currency area is interested in conditions allowing countries to explore with confidence of the renouncement in the use of the exchange rate as an instrument of economic policy.

To commit to be an optimal currency area is first of all a means to stop using the exchange rate adjustment as a weapon of shocks between member states (that is to say as a policy instrument) or by fixing their exchange rates irrevocably, either by adopting a common currency, while relations with the rest of the world continues to be done at variable rates.

The theory of optimum currency area is to analyze the conditions to minimize the cost of such a renunciation. In other words, we are interested in conditions allowing countries to consider with confidence the renunciation of the use of the exchange rate as an instrument of economic policy.

An optimum currency area (OCA) is an area in which regions are affected primarily by symmetric shocks and that have, in the face of asymmetric shocks, automatic adjustment mechanisms. These mechanisms may be the flexibility of labor markets, especially labor mobility, flexibility of real wages and fiscal transfers between regions.

The criteria contained in the Maastricht Treaty convergence criteria are rated. They therefore constitute references that are designed to ensure that member countries do not record inflation differentials. Indeed, the removal of these differentials allows member countries to forego the exchange rate as an adjustment variable.

Of the five criteria, three relate directly to the rate of inflation (inflation, exchange rates, interest rates), the other two (budget deficit and public debt) is to prevent any risk of debt monetization. Be aware that compliance with the convergence criteria does not mean that the euro area is an optimal currency area.

Tags: European Union; optimal monetary area; compliance with convergence criteria; theory of optimum currency area;

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