Файл: 03b_€_debate.pdf

www.fh-joanneum.at

MANAGEMENT 

Optimal Currency Zones 

Labour 

Market  

Flexibility 

Real Economic Convergence 

Highly 

Flexible 

Inflexible 

Divergent 

Convergent 

High risk 
currency union 

www.fh-joanneum.at

MANAGEMENT 

Optimal Currency Zones 

Labour 

Market  

Flexibility 

Real Economic Convergence 

Highly 

Flexible 

Inflexible 

Divergent 

Convergent 

Monetary Union 
Works 

High risk 
currency union 

www.fh-joanneum.at

MANAGEMENT 

Is the Euro an Optimal Currency Zone? 

Professor Robert Mundell 

The 1999 Nobel Prize Winner 

"for his analysis of monetary and 
fiscal policy under different 
exchange rate regimes and his 
analysis of optimum currency 
areas" 

www.fh-joanneum.at

MANAGEMENT 

Tensions in the Euro Area (1) 

•

Recession in Euro Area as a whole (-2% in 2009) 

•

Riots and protests 

–

Fears of deep cuts in real wages 

–

Rising unemployment 

–

Strong Euro making life very tough for exporters 

–

Many peripheral Euro Area countries are struggling e.g. Greece, 

Ireland, Italy, Portugal and Spain  

–

Huge divergence in competitiveness showing up in massive 

trade imbalances  

–

But no chance of nominal exchange rate adjustment 

–

So downward pressure on wages and jobs. 

www.fh-joanneum.at

MANAGEMENT 

Tensions in the Euro Area (2) 

•

Fiscal policy is coming under pressure: 

–

Bail outs for financial institutions 

–

But smaller EU states have little chance of doing this 

–

Cross-border contamination e.g. heavy investment into 

CEEC’s by Austrian banks 

–

Downgrading of credit rating for several Euro Area 

countries including Spain and Greece 

–

Makes it more expensive for companies and the 

government to finance borrowing 

–

Think of consequences for investment and growth 

What happens if one or more countries leave and devalue 

their way to an economic recovery?