Optimum Currency Areas
By Arnold Kling
Martin Feldstein explains why Europe is not an optimum currency area, even though the United States is one.
First, American employees move within the country when demand is relatively weak in a particular region, facilitated by a common language and a culture that regards moving across the country as perfectly normal. Germans are not leaving Germany in large numbers for areas of Europe with faster growth or lower unemployment. Second, wages are much more flexible in the US than in Europe, reducing the decline in regional employment that occurs when demand falls. And third, the US has a federal fiscal system that directly offsets about 40 per cent of the relative decline in any state’s gross domestic product by a lower outflow of taxes to Washington and a higher inflow of transfer payments. European fiscal systems are still largely national.
After reading Feldstein’s piece (which I found while browsingStephen Kirchner), I recommend this illuminating discussion between Nobel Laureates Robert Mundell and Milton Friedman. Mundell was optimistic that a currency union will lead to greater price flexibility and more deregulation in Europe. Friedman was more concerned about the possibilities that Feldstein observed.
For Discussion. Do you think that there is still a chance that the euro will force wages and prices to become more flexible in the participating countries?