An analysis of the EU optimum currency area

Abstract

Robert Mandel in 1961 published his famous article 'The theory of optimum currency area' where he presented his idea about optimal monetary area. Almost 40 years later, in 1999, the European Union (EU) has set up its own monetary area with a common currency, the euro, and since 2002 the euro is used as a means of payment in the EU. Since the beginning of the process of monetary integration in Europe there has been discussion as to whether the European Monetary Union (EMU) can be qualified as an optimal currency area and about the decision of the member states to introduce the common currency. Faced with the current crisis of the common currency, this skepticism becomes more intense, and it seems now to be the right time for a discussion on the Theory of optimum currency areas (OCA) and for an examination of the criteria for creation of a common currency area. This paper provides an answer to the question whether EMU is an optimal currency area. The answer is based on the analyses of a case study.