Is Europe an Optimum Currency Area?
Letter to the Editor

In his "Back to Basics" article on the Euro’s fifth anniversary, one would have thought that Mr. Faruquee would have raised the most basic of questions about the relative merits of the idea of a single currency for Europe ("Euro Turns Five: Europe’s Grand Experiment"). Does Europe remotely satisfy the criteria for an optimum currency area and, if it does not, what does Europe need to do to bring itself closer to meeting those criteria?

This question would seem to be of present relevance in the face of the very lackluster economic performance of Germany, Europe’s largest economy, which is presently suffering from the lack of an independent monetary policy to stave off deflation. It would also seem to be of relevance to the question as to whether it makes sense to include in the Euro experiment yet another ten countries. Those countries are economically even more diverse than the original 11 countries that adopted the Euro in 1999, which will only add further strain to the ECB’s one monetary policy fits all experiment.

Historic experience suggests that a currency union similar to that of the Euro will only hold together if that union satisfies the criteria of an optimum currency area. Among the more important of those criteria are economic homogeneity among members, wage flexibility, labor market mobility, and a system of federal fiscal transfers. Can one really say that Europe satisfies those criteria? Can one really be so sure that over the next five years Europe will not be subjected to an asymmetric shock that will reveal the weak economic underpinnings of Europe’s Grand Currency Experiment?

Desmond Lachman is a resident fellow at the American Enterprise Institute.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman

What's new on AEI

To secure southern border, US must lead international effort to stabilize Central America
image The Ryan pro-work, anti-poverty plan: Thomas Aquinas 1, Ayn Rand 0
image Does SNAP support work? Yes and no
image Obama Democrats lose their big bet on health exchanges
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Monday, July 21, 2014 | 9:15 a.m. – 11:30 a.m.
Closing the gaps in health outcomes: Alternative paths forward

Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.

Monday, July 21, 2014 | 4:00 p.m. – 5:30 p.m.
Comprehending comprehensive universities

Join us for a panel discussion that seeks to comprehend the comprehensives and to determine the role these schools play in the nation’s college completion agenda.

Tuesday, July 22, 2014 | 8:50 a.m. – 12:00 p.m.
Who governs the Internet? A conversation on securing the multistakeholder process

Please join AEI’s Center for Internet, Communications, and Technology Policy for a conference to address key steps we can take, as members of the global community, to maintain a free Internet.

Thursday, July 24, 2014 | 9:00 a.m. – 10:00 a.m.
Expanding opportunity in America: A conversation with House Budget Committee Chairman Paul Ryan

Please join us as House Budget Committee Chairman Paul Ryan (R-WI) unveils a new set of policy reforms aimed at reducing poverty and increasing upward mobility throughout America.

Thursday, July 24, 2014 | 6:00 p.m. – 7:15 p.m.
Is it time to end the Export-Import Bank?

We welcome you to join us at AEI as POLITICO’s Ben White moderates a lively debate between Tim Carney, one of the bank’s fiercest critics, and Tony Fratto, one of the agency’s staunchest defenders.

No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.