A. Monteverdi, Optimum currency area theory and EMU: lessons from the Euro crisis, CROIE Working Paper (CROIE-WP/2/2016, December 2016).
The theoretical literature on monetary integration has been traditionally dominated by the theory of optimum currency areas (OCA). This analysis has its origins in a debate, during the 1960s, between Mundell, McKinnon and Kenen about the criteria which delineate the optimal domain of a currency area. Between the 1980s and early-1990s the traditional OCA theory was gradually modified in line with new theoretical developments. This new phase led to a “new” OCA theory with very different policy implications compared with the traditional approach. The Treaty of Maastricht symbolized the triumph of the new OCA paradigm. The euro crisis has, instead, represented the revenge of the traditional approach. This paper traces how the optimum currency area theory has evolved over time and uses the OCA theory as a framework within which the Eurozone’s governance, crisis and future are examined. Evidence presented in this paper suggests that the Economic and Monetary Union (EMU) has had asymmetric effects on its member States while it lacks of adequate instruments to deal with them. The fact that the EMU did not constitute an OCA, according to the traditional paradigm, contributed to the crisis of the euro area. The paper leads to the conclusion that, without the introduction of supranational adjustment mechanisms, the Eurozone will not survive its own imperfections.