Date of Award
Bachelor of Arts
The Eurozone, it appears, is in a constant state of crisis. While other major economic players have mainly recovered from the 2008 Global Financial Crisis, the Eurozone as a whole seems to have never escaped the economic malaise caused by that dreadful event. Perhaps more startling is the divergence seen within the Eurozone itself, as a few relatively wealthier, healthier members such as Germany and Austria pull away from the larger pack of poorer, languishing ones, such as Greece and Portugal. A currency union should be effective and cohesive, yet the Eurozone has been largely ineffective and fragmented in handling the recent onslaught of crises. Why is this the case, and what is it about the organization of the euro itself that has lead to these outcomes? To answer these sorts of questions, this paper will take as its starting point Robert Mundell’s seminal work on Optimum Currency Area (OCA) Theory in 1961, along with subsequent criteria outlined in line with this theory (Kenen, McKinnon) in order to utilize a particular lens through which one might approach and analyze the Eurozone’s current troubles. The classical OCA Theory offers seven different criteria that qualify economic areas as fit for sharing a common currency. This paper will reveal that understanding one criterion, the incidence of asymmetric shocks, is critical to deciphering Europe’s most pressing problems, which can be mitigated by two other OCA criteria that function as shock absorbers: labor mobility and fiscal integration. While returning to the 1960s to solve highly contemporary problems may seem counterintuitive, this rather original method provides particular insights on the Eurozone’s difficulties that may have otherwise been overlooked, and also furnishes a rich intellectual exercise in the theory and its application. The structure of this paper is as follows: (1) I will review the pillars of classical OCA Theory, as first put forth by Mundell, McKinnon, and Kenen; (2) discuss the various criteria by which these theorists define the Optimum Currency Area and identify those that are most critical; (3) touch upon briefly the presence of asymmetry in the Eurozone; (4) discuss Eurozone labor mobility in-depth; (5) analyze the depth of fiscal integration within the Eurozone; and finally, (6) offer some concluding remarks concerning the future viability of the euro.
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Cappellazzo, Richard L., "The Future of the Euro: Assessing the Viability of the Common Currency through the Lens of Classical Optimum Currency Area Theory" (2016). Economics Student Theses and Capstone Projects. 25.