Evaluating Optimum Currency Areas: US vs. Europe

Ben Emons of PIMCO writes a fab piece on the topic.

He points how labor mobility is one of the major factors which makes US a more optimum currency area compared to Eurozone. Even though US is a better OCA, ECB delivers better inflation performance and growth rate of EU is just 0.5% lower than US (in period 1999-07). So it is not as if a more optimum Currency area helps gain big benefits. This crisis should push Eurozone leaders into more labor mobility:

  • Research shows that wage rigidity — defined as wage freezes or cuts as a fraction of total workers —  is much lower in the U.S. than the eurozone. Eliminating these rigidities is crucial for the eurozone’s growth as an optimum currency area.
  • Albeit painful, the intensity of the debt crisis in Europe may force a quicker progress of reform implementation, which could be a competitive advantage for the EMU in the future. 
  •  Although the U.S. appears to be more of an “optimum currency area” than the EMU, this advantage does not necessarily translate into higher and more sustainable economic growth for the future.
Barring labor mobility, EU also needs some serious political mobility as well. The way they have been reacting to the crisis has been nothing short of a political thriller..

One Response to “Evaluating Optimum Currency Areas: US vs. Europe”

  1. India as a monetary union…how does it work? « Mostly Economics Says:

    […] union – labor mobility, fiscal union etc) and how US is closer to the optimal mon union. (see this and this for some recent discussion). Canadian Blog pointed to some […]

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