European Economic and Monetary Integration, and the Optimum Currency Area Theory

This essay follows the synergies and complementarities between European Economic and Monetary Union (EMU) and the optimum currency area (OCA) theory. Various advancements in economic theory and econometrics have made it possible to progress from the “early OCA theory†to a “new OCA theoryâ€. The balance of judgements has shifted in favour of monetary union: it is deemed to generate fewer costs and there is more emphasis on benefits. The “endogeneity of OCA†has further strengthened this consideration. Yet there is still no simple OCA test. When EMU made the leap to the Maastricht Treaty, the OCA theory could not deliver clear policy guidance. Plans for EMU went ahead as a follow-up of the Single Market Programme (SMP) with only limited direct input from the OCA theory.