What is the Euro Zone and is it an Optimum Currency Area?
The Euro Zone is a common currency area of 17 countries with one currency, the Euro, and with a common central bank, the European Central Bank, (also known as the ECB). The mandate of the ECB was to maintain price stability in the EZ but it had no authority to act as a lender of the last resort. Now Jamaica and the USA, for example, are common currency areas but unlike the EZ, these currency areas comprise one country with national fiscal and monetary authorities. On the other hand, the EZ includes many nations and no fiscal authority. Is this latter arrangement sustainable?
This issue comes under the topic of Optimum Currency Areas (OCAs), which may be described simply as ‘the best area to use a single currency’ (Oxford Dictionary of Economics). What are these requirements and does the EZ meet them?