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Is the EMU an Is the EMU an OCA?OCA?

Theories of Optimum Currency Area

Team Members:García Mora, NataliaRivero Silva, Paula

Lecturer:Javier Quesada

Macroeconomics International Group

What everybody knows

• The EMU it is a currency area but not an Optimum one.

• There is high potential to be a good OCA but two issues are not satisfied

1 - Not a full Economic Integration

2 - No Fiscal Integration

Conditions

• 1st: Synchronization of business cycles

• 2nd: Labour Mobility

• 3rd: Intra-Trade

Core Regio

n

Periphery

Region

1st C: Synchronization Business Cycles

Real Growth Rates

•Data Source: OECD Data Bank

Core-Region

Highlights

•High convergence

•Almost equal capacity to recover

and speed of adjustment

•Clear synchronization of cycles: expansion

and recession

•Data Source: OECD Data Bank

Periphery Region

Highlights

•No clear convergence

•Lower ability and speed to recover

•Data Source: OECD Data Bank

1st Conclusions • FIRST GROUP OF

COUNTRIES

• Better ability to recover and react to the shocks of business cycles

• Crisis depression: this region decrease quicker and with a higher level

• Expansion: this countries are able to grow quicker

• HIGHER FLEXIBILITY AND SPEED OF ADJUSTMENT

• SECOND GROUP OF COUNTRIES

• Less ability to recover and react to the shocks of business cycles

• Crisis depression: decrease slowly

• Expansion: this countries are able to grow slowly.

• LOWER FLEXIBILITY AND SPEED OF ADJUSTMENT

2nd C: Labour Mobility

•Data Source: Eurostat Satistics

Highlights•Benefits from the

monetary union

•Demand for low skilled workers

•Two main sectors:

construction+services

•Inward Migration Patterns (2000-08) vs. traditional ones

•Data Source: Eurostat Satistics

Highlights• Relation between unemployment rates and migration trends

•The main reasons for migrating: job seeking boost in construction and service sectors (booming period)

• Crisis affected specially periphery countries outward migration patterns • Beginning of labour mobility first steps?

•Data Source: Eurostat Satistics

Highlights

• Relation: unemployment + educational level

• The higher the education level

tertiary level lower risk of unemployment

• Spain is quite similar for the three categories

• Young unskilled are

the first on loosing their jobs

• Migration during the booming period – low

education level

• Droop out of schools quick money from construction sector

• Change in the actual generation rising

academic share

•Data Source: Eurostat Satistics

2nd Conclusions • Labour Mobility is still very low across the EMU countries

• Certain kind of barriers to move:

-Cultural Factors

-Language

- Economic Incentives not so high

• Labour mobility as a mechanism of adjustment still slow and takes time to get over the asymmetric shocks

• Even though there is a relief for markets thanks to Outward Migration

• Assumption part of the inward migration during the booming period have already left

In order to impulse mobility some reforms should take place:

• Common provision

• Basic health insurances as instance

•Pension plans and unemployment securities

3rd C: Intra-Trade Degree

•Data Source: OECD Data Bank

• The degree of trade integration across Europe:

− is quite variable

−but quite high on average.

−appears to have been rising over time in nearly every country

− it has increased most strongly on average over the last five years or so of data.

• Being a member of a currency union may enhance the degree of trade between members of the union, precisely because of the decline in transactions costs in carrying out such trade.

• Many European countries have gained a great deal from the reduction in transactions costs in international trade as a result of the single currency.

3rd Conclusions

Comments + General Conclusions

• Europe need a bigger and deeper political and economic centralization (critized)

• EMU could work property but not all the countries that belongs to it fulfil the necessary condition to be a part of an OCA

• Little evidence of per capita GDP convergence.

• Real growth dispersion on a declining trend low degree of business cycle synchronization

• Labour mobility does not work as a mechanisim of adjustment

• Not clear evidence of Intra-Trade benefits

The art of economics “It keeps cropping up all over the place. There is economics

of money and trade, of production and consumption, of distribution and development. There is also an economics of welfare, manners, language, industry, music, and art. There is an economics of war and a economics of power. There is even an economics of love. Economics seems to apply to every nook and cranny of human experience. It is an aspect of all conscious action. Whenever alternatives exist, life takes on an economic aspect . It has always been so. But how can it be? It can be because economics is more than jus the most developed of the sciences of control. It is a way of looking at things, and ordering principle, a complete part of everything. It is a system of thought, a life game, an element of pure knowledge.”

Robert A. Mundell

Thanks for your attention