Euro zone debt crisis: theory of optimal currency area

Creation of a monetary union, carries along certain costs and
benefits. Benefits of monetary union mainly stem from reducing
transaction costs and eliminating exchange-rate uncertainty. On the other
side, a country that joins a currency union, therefore gives up the
opportunity to select a monetary policy, that it regards as optimal for its
own circumstances.
In this paper we explain the criteria of optimum currency area
(OCA): degree of trade, similarity of business cycles, degree of labor and
capital mobility and system of risk sharing. Viewed through the prism of
these criteria, EMU is currently far from being an optimal currency area,
especially in fulfillment criteria of labor mobility and fiscal integration.
The aim of the paper is to highlight certain shortcomings of the
EMU, such as its vulnerability to asymmetric shocks and its inability to
act as predicted by the theory of optimum currency areas. Furthermore,
we explain the reasons behind the difficulties that the euro area faced,
and the problems that led to the outbreak of the sovereign debt crisis. At the end, we laid out several steps that could be taken or conditions that
could be met in the euro zone in order to move toward optimization.
Key words: euro zone, debt crisis, optimal currency area,
business cycles, convergence criteria.
JEL classification: F15, F21, F23, F31, F36, F44, F45