Towards Optimum: Can Europe become an optimum currency area

Abstract

The purpose of this thesis is to study the Eurozone and give an answer to the question: Can Europe become an optimum currency area? Our analysis is based on theory structured in the form of several criteria for an optimum currency area, which we compare with our findings from the Eurozone. Our result shows that the Eurozone does not satisfy the criteria of high-factor mobility or wage flexibility. This is due to low-labour mobility and wage rigidity (wage rigidity is especially a concern for the northern countries). Another challenge faced by the Eurozone is the control of member government spending and economic stability through the Stability and Growth Pact. Our result further shows an increase in intra-trade in Europe, since the implementation of the Euro, which can be an important trend for the development of an optimum currency area.