Is the Euro Zone an Optimum Currency Area?

16 Pages Posted: 12 Aug 2008

See all articles by Yuliadi Kadarmo

Yuliadi Kadarmo

Graduate European Studies School, University of Indonesia

Date Written: August 11, 2008

Abstract

The European Union (EU) was set up to create more prosperity through cooperation among all Europeans. Now, the EU is a family of 27 democratic countries. From January 1, 1999 to 2008, there has been 15 the EU Member states participate in phase three Economic and Monetary Union (the Euro Zone = EZ-15), namely (1999) Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, Netherlands, Austria, Portugal, and Finland; Greece (2001); Slovenia (2007), Cyprus and Malta (2008).

The purpose of this paper was to investigate whether the Euro Zone was an Optimum Currency Area (OCA) base on an economics. The economic data for this research was collected from the Eurostat. We used the quantitative methodology by the Pearson correlation to examine an economic convergence criteria in the Maastricht Treaty (the Euro Adoption Criteria) i.e. five (5) nominal economic convergences, and two (2) real economic convergences for the EZ-15. The nominal criteria are price stability, long-term interest rate, public surplus/deficit, public debt, and currency exchange rate. The real criteria are unemployment rate, and rate of real GDP per capita.

Our finding showed that the EZ-15 fulfilled the Euro Adoption Criteria i.e. economic convergence criteria. The results suggest that the Euro Zone has a single currency and a single supranational monetary authority (ECB) in this area for aggregately analysis. For partially analysis, we have low correlation significance among the EZ-15 according to the nominal and real economic convergences, meaning the Euro Zone is not an OCA.

Keywords: OCA, Euro Zone, nominal and real economic convergences, Pearson correlation

JEL Classification: O5, O52

Suggested Citation

Kadarmo, Yuliadi, Is the Euro Zone an Optimum Currency Area? (August 11, 2008). Available at SSRN: https://ssrn.com/abstract=1165842 or http://dx.doi.org/10.2139/ssrn.1165842

Yuliadi Kadarmo (Contact Author)

Graduate European Studies School, University of Indonesia ( email )

Jl. Prof. Sumitro Djojohadikusumo
Depok, DKI 16424
Indonesia

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