Optimal Currency Area Theory in Euro’s Context

The optimal currency area (OCA) is fundamentally the geographical area in which the efficiency of a single currency is plausible. Various reasons would necessitate determining whether an area is ideal to have a common currency before making such a decision. First, decision-makers such as international leaders need to assess the economic inefficiencies that the introduced currency will address. Also, it is vital to project the consequences of dismantling or simply extending a given form of currency to more than one region. The optimal currency region theory thus provides a broader perspective by assessing the underlying factors and ultimate determinants. The approach holds that a common currency is likely to be beneficial to specific regions that are unbounded by certain national borders. One of the principal advantages of OCA theory is a significant increase in trade in geographical regions affected by new shared currency.

Eurozone The Eurozone – officially the euro area – is the geographical region comprising of a monetary union among 19 member states of the European Union (EU). These countries have expediently agreed on adopting the euro (€) as the sole legal tender. The implementation of the Eurozone followed a convention held in 1998 in which eleven European Union member states agreed to launch the Euro on January 1, 1999. In the subsequent year, the union accepted Greece’s request to join the zone.

The Euro and Optimal Currency Area One of the most significant applications of the OCA theory since its inception is the Eurozone and in the United States. The EU’s Eurozone measures portray a significant attribution to the OCA theory, although several scholars and leaders have attempted to justify the unworthiness of the EU as a successful application of the approach. Thus, it is vital to develop a practical mechanism that demystifies the key criteria set out by the theory and how the Eurozone meets them.

Economic Symmetry The EU economic integration is undeniably an endogeneity hypothesis, which holds that political integration creates a significant increase in economic gains for the integrating countries. Such integration is enshrined within Mundell’s OCA criterion of economic symmetry.

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