Question

Which currency area, the 50 states of the United States or the member nations of the euro-zone, performs better as an optimum currency area?

Answer 1

Optimum currency area is defined as a region which would benefit from a common currency being in place. A specific geographic area made up of different regions would benefit drastically with the help of using a uniform currency across several countries in the region. It helps to increase trade, enhance economic efficiency and leads to a greater level of labor mobility.

According to studies, the 50 states of the United States perform better as an optimum currency area as compared to the member nations of the euro-zone.

Mainly because of the reasons that U.S has a higher level of labor mobility across regions as there are limited restrictions in place. It also has more transfer payments which increases terms of trade and helps increase the ease of transactions. Goods market integration is higher in U.S. Fiscal transfers which are the main stabilizing factors, predominantly exist in the U.S as there is a central authority in place.

In the Euro-zone labor is less mobile and less flexible. There is huge difference in unemployment rates between various regions. And the rate appears to be persistent in some parts of the zone. There is symmetry of scale of shocks in EU and U.S but fiscal transfers by the central authority are not prevalent in the EU.