Competition, Spatial Location of Economic Activity and Financial Issues
Edited by Miroslav N. Jovanović
Chapter 16: Asymmetric Shocks and Monetary Disintegration: The Case of the Eurozone
Franco Praussello 1 INTRODUCTORY REMARKS The tenth birthday of the European monetary integration, with its institutional superstructure, the Economic and Monetary Union (EMU), has been greeted by one of the worst recessions since the Great Depression of the last century. Disturbances induced by the downturn have tested the resilience of the new monetary structures, producing one of the not so frequent cases in which economic developments create a ‘laboratory’ for testing the validity of some economic conjectures, in this instance mainly the theory of optimum currency areas (OCAs), on which such a structure has been based. Indeed, the economic crisis could be thought of as the occurrence of a major asymmetric shock hitting in a country-specific way the different economies included in the eurozone. One of the main propositions of OCA theory is that the monetary authority of the European Union (EU), that is, within EMU, the European Central Bank (ECB), could not offset the negative consequences of a country-specific disturbance, which therefore had to be adjusted by mechanisms other than the monetary and exchange rate policies, such as flexibility of the labour market, mobility of the workforce, and public or private insurance tools, reducing the costs for the damaged country in terms of income loss and higher unemployment. Since in the case of EMU such mechanisms were weak or even straightforwardly absent there was the risk of fostering divergences among member countries, jeopardising the long-term survival of the eurozone. One of the clearest alarm bells signalling the danger was...
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