by afew
Mon Apr 20th, 2015 at 02:20:13 AM EST
Frances Coppola reposts these charts in an article on Pieria:
It was tweeted by RBS, who captioned it: One of these is an Optimum Currency Area. And the other isn't.
Not so simple, says Coppola.
Optimising the Eurozone
Robert Mundell, the inventor of the Optimum Currency Area (OCA) concept, defined the essential requirement for an OCA as free factor mobility. Since his rather vague definition, though, the concept has been developed further. Economists now generally agree that four criteria must be met for a group of regions or countries to qualify as an OCA:
- regions/countries should be exposed to similar sources of economic disturbance (common shocks);
- the relative importance of these shocks across regions/countries should be similar (symmetric shocks);
- regions/countries should have similar responses to common shocks (common responses)
- if regions/countries are subject to local economic disturbances (idiosyncratic shocks), they must be able to adjust to them quickly.
In practice, this means that regions/countries need a high degree of economic, political and cultural similarity to qualify as an OCA.
It is now generally understood that the Eurozone does not qualify as an OCA.
But what about the USA?
Optimising the Eurozone
In this paper, Michael Kouparitsas of the Chicago Federal Reserve considers whether the USA meets the criteria for an OCA. He divides the USA into eight groups of states, which he calls "regions". Five of these are broadly similar in the kinds of shocks that they experience and their response to them, but the remaining three differ significantly from the other five. Kouparitsas therefore concludes that the USA is not an OCA.
So neither of these charts depicts an OCA.
How then to explain the evidently greater homogeneity of unemployment rates among American states, compared to Eurozone member states?
Optimising the Eurozone
Firstly, the USA is a federation. Each state has its own government, but there is also a fully functional fiscal authority at federal level with tax and spending powers. Automatic fiscal stabilisers - unemployment benefit and income taxes - are harmonised across the federation (...)
In contrast, the Eurozone has no federal fiscal authority with tax and spending powers. Automatic stabilisers operate at state, not federal, level and there is little attempt to harmonise them - indeed attempts to harmonise tax rates are met with fierce resistance from member states. Similarly, budgets for pensions, education, healthcare and defence are set by the individual states without reference to each other (...)
Secondly, the USA is a transfer union. Richer states support poorer ones by means of federal fiscal transfers. (...)
In contrast, the Eurozone has little in the way of fiscal transfers: there is development aid to poorer regions, and systematic help for farmers in the Common Agricultural Policy, but that's about all. (...)
Thirdly, the USA has a monetary authority with a dual mandate. The Fed is responsible for maintaining both price stability and full employment. (...)
In contrast, the ECB is only responsible for price stability. Provided that inflation is under control, the ECB has no reason to do anything at all about high unemployment. (...)
Finally, the USA - although not an OCA - has a common language and free movement of people both in theory and practice (...)
No need to complete that with the final counterpoint, we all know that Europe doesn't have a common language or free movement of people in practice.
Optimising the Eurozone
So the high unemployment across the Eurozone and huge divergence in unemployment rates between member states is primarily due to the incomplete union. It isn't necessary to be an OCA to have low convergent unemployment levels in all states. It is merely necessary to have a sensible, coherent system of governance. That is what the Eurozone does not have.
Coppola says that completion of the union by addressing these points might be possible. However,
Optimising the Eurozone
I just don't see that the political will to create a workable union exists: all I see is a lot of countries pursuing their own narrow interests and refusing to support, or even cooperate with, each other. While such attitudes prevail, the union cannot be completed and will eventually fail.
That is, indeed, the most likely outcome.
Nothing here that we don't know or have not discussed on ET. But it's a good summary, if you need a downer.
