Economic Imbalances and Institutional Changes to the Euro and the European Union by Mirdala Rajmund;Canale Rosaria Rita;

Author:Mirdala, Rajmund;Canale, Rosaria Rita;
Language: eng
Format: epub
Publisher: Emerald Publishing Limited
Published: 2017-08-01T00:00:00+00:00

THE THEORY OF OPTIMAL CURRENCY AREA-BASED BU

Mundell (1961) argued that in the case of asymmetric shocks and structural rigidities in the labor market exchange rate could be an important tool to restore economic balance. McKinnon (1963) argues that if one country is more open to the world, there is a lower usefulness of flexible exchange rate. Mundell (1961) argued that, in case of asymmetric shocks and structural rigidities in a labor market, the exchange rate could be an important tool to restore economic equilibrium. Mundell (1968, p. 177) says that “the single currency imply a single central bank” and easier “adjustment inside the currency area, which has a single currency and currency space.” He defines an optimal currency zone “as an area of internal mobility of factors (including among-regional and inter-industrial mobility) and external factor immobilization.” Kawai (1987) relying on the Mundell theory emphasized that if countries are highly integrated into the financial trading then capital flows can smooth episodic asymmetric shocks.

In the nineties of the last century, many economists have used the Mundell theory as a tool to explain whether a country should or should not join the monetary union. This approach is contrary to the original intention of the Mundell (1998, p. A22) and the theory of the inconsistent quartet formulated by Padoa-Schioppa (1987). The main argument that has emerged from these debates is that the flexibility of factor markets (capital and labor) could be the key criteria for an explanation of optimum currency areas. Flexibility should pertain to two aspects: across-the-board mobility and flexible prices (Geeroms & Karbownik, 2014, p. 7). Many economists criticized this argument stating that labor mobility is higher in the United States than in Europe and that Europe could be the optimum currency area (Eichengreen, 1991).

The mobility of labor is close to zero between North and South, and at a very low level between the West and the East of the EU (Geeroms & Karbownik, 2014, p. 7). The annual mobility within the 15 EU countries and between regions shows an annual average rate of 1% and cross-border mobility of 0.35%.

Both mobility with and between countries in the EU is well below the rate in Australia (1.5%) and the United States (2.4%), although rates are similar to those of the Canadian provinces (OECD, 2012, p. 64; Fig. 1).

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