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Is Eurozone an optimal currency area? Provide a critical assessment of this issue using key theoretical and empirical indicators including your analysis of the extent and the pattern of intra-industry trade within the Eurozone trading area in part (b), and an analysis of the extent of labour mobility in the Euro-zone trading area.
Optimal currency area refers to a geographical region where it could amplify economic efficiency to share a single currency in the entire region (Steven and Michael, 2007). There is no doubt that Eurozone is not an optimal currency whereas the evidence suggesting United States as an optimum currency area. Although the creation of the euro is often cited and the optimal currency theory has been most frequently used in recent years to euro, many have argued that the EU does not actually appear to satisfy all of the criteria for being an optimal currency area.
The extent of intra-regional trade is the first criteria of optimal currency area to decide if it can be optimal currency area. If the currency union’s economy is closely linked to its own, a country is willing to join a currency union to get more profits. The overall degree of economic integration can be evaluated by both of the integration of product markets, which is the extent of trade between the joining country and the currency area, and factor markets, which the labor and capital mobility is easy to migrate between joining country and the currency area. Almost 10 to 20 percent, which is larger than the number for trade between EU and United States of EU members output has been exported to other EU members. Also, the extent of intra-European trade is not large enough to serve as an optimal currency area, and there are still some restrictions, which limited the development of trade since 1992 reforms removed. The following figure points out intra-EU trade as a percentage of EU GDP. As you can see from the figure, intra-EU trade decreases sharply in the year after removing reforms, and later is just around the prior peak. It is not very clearly that if the measures in 1992 have pushed Europe dramatically closer to be an optimal currency area. Meanwhile, the volume of intra-EU commerce has not been high enough to form the European Monetary Union in 1999.
Labor mobility is another key criteria for optimal currency area. Since the formation of the EU’s Single Market with freedom of movement of services, capital, goods and labor in 1993, the border control probably cannot be the reason of the barriers to labor mobility within Europe. Unlike United States, labor is not moving freely. Labor movement is discouraged by the differences in languages, cultures and social security systems. There still some limitation of labor mobility even in European countries, which will partly due to governmental restriction. There is a risk of high employment rates of product market as the existence of limited labor mobility. It is difficult to balance economic shocks through labor migration within the European Union and seeking jobs from a region, which is far from their own country, is harder for unemployed workers.