Question

What are the sources of incompleteness of the EMU as an Optimal Currency area?

i. Lack of labor mobility

ii. The solidarity effect: the significant amount of fiscal transfers among regions

iii. Asymmetric economic shocks

Answer 1

The European Economic and Monetary Unit (EMU) implies that the Euro area may turn into an Optimal currency Area (OCA) after the launch of the Monetary Union, even if it were not an optimal currency area before.

However, there were many asymmetries that acted as a limitation for the process -

i) it can only target the average inflation rates for the whole monetary union, and could conceivably foster economic divergence within the union

ii) larger euro area countries have far been slower than others in securing structural reforms, thus restricting their structural mechanism and hindering their ability to cope with economic events

Ans. (C)