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

Holder will regret his refusal to obey the Constitution
image 'Flood Wall Street' climate protesters take aim at their corporate allies
image 3 opportunities for better US-India defense ties
image Is Nicolás Maduro Latin America's new man at the United Nations?
AEI on Facebook
Events Calendar
  • 29
    MON
  • 30
    TUE
  • 01
    WED
  • 02
    THU
  • 03
    FRI
Thursday, October 02, 2014 | 9:00 a.m. – 10:30 a.m.
Campbell Brown talks teacher tenure

We welcome you to join us as Brown shares her perspective on the role of the courts in seeking educational justice and advocating for continued reform.

Event Registration is Closed
Friday, October 03, 2014 | 12:00 p.m. – 1:00 p.m.
Harnessing the power of markets to tackle global poverty: A conversation with Jacqueline Novogratz

AEI welcomes you to this Philanthropic Freedom Project event, in which Novogratz will describe her work investing in early-stage enterprises, what she has learned at the helm of Acumen, and the role entrepreneurship can play in the fight against global poverty.

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