Monday 23 May 2011
To what extent does economic and monetary union, represented by the euro, represent an optimal currency area?
An optimal economic area is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. There are both advantages and disadvantages of being in the euro. The advantages are quite simple, in that no switching of currencies for trade or travel reduces the cost to a minimal point for consumers and firms. However being in the euro also creates problems for some individual countries involved. This is because countries cannot base their interest rates to suit their needs. Instead it is set as a whole currency. The interest will always be set to a maximize the benefits, however there will still be countries that loose out and find the rates set almost impossible to deal with.
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An optimal currency area (OCA) is a geographical region where it is thought a single currency would help to maximise economic welfare. An OCA does not have to be larger than one country, for example one might argue the case for regional currencies e.g. between the north and south of the UK or between the east and west of the USA!
ReplyDeleteThe Eurozone is not an Optimal Currency Area!