The so-called currency area refers to a region in which the currencies of the member countries maintain a peg to each other and a joint float of currencies outside the zone. In theory, any country would face the question of the most modest currency zone, i.e. whether it would be appropriate to form a single currency area or to form a monetary zone with some other countries. If, for a country, it is a separate currency area, it means that it has a floating or flexible exchange rate system. The question is what criteria are used to determine which countries are suitable for forming a common currency zone. There are obvious differences in the criteria emphasized by different scholars.
Overall assessment of stabilisation measures
Most of the implemented/proposed stabilisation measures decrease the EMU’s vulnerability to asymmetric shocks or enhance its ability to act. The EMU continues to face adjustment difficulties in reaction to macroeconomic disturbances, as labour mobility remains low and financial transfers are granted only as emergency payments rather than as a long-term stabilisation mechanism for financially distressed regions.
The significance of the most moderate currency zone theory
1． It is conducive to promoting the economic integration of the region and greatly improving the overall economic well-being of the region
One of the prerequisites of regional monetary integration is to realize the free flow and unified sharing of human, capital and commodity elements in the region. The free flow of elements in the region is not only conducive to promoting trade liberalization in the region, thus greatly improving the efficiency of intra-regional trade, but also conducive to making full use of the region’s human, material and financial resources, realizing the integration and optimal allocation of resources, so as to reach easy agreement on macroeconomic policy formulation, and directly promote the development of the economic integration process in the region.
2． It is beneficial to reduce the cost of currency exchange and avoid exchange rate risk between currencies in the region
The primary form of regional monetary integration is that currencies among members of the region are freely convertible and fixed in price. Such a rule would undoubtedly lock in exchange rate risks among members of the region and greatly facilitate trade settlement among member states of the region. When regional monetary integration moves towards its highest form, the single currency, the currencies of the member countries in the region withdraw and are replaced by the “one-way” single currency, thus making international trade among the member countries of the region “domestic trade” and the so-called “exchange cost” of currencies among member countries.
3． It is beneficial to integrate the financial resources in the region and reduce the cost and risk of investment and financing
International investment and financing is not only expensive, but also risky. Regional monetary integration is conducive to the sharing of financial resources in the region, and at fixed exchange rates to lock in exchange rate risk, under the common monetary policy, can also lock in interest rate risk. Under these conditions, Member States would also not need to retain too much international reserves, thereby reducing the total cost of idle resources. It should be said that the integration of financial resources is at the core of the integration of human, commodity and capital factors, so the realization of the single currency in the region is the highest form of regional economic integration.
4． It is conducive to strengthening regional integration and cooperation, and consistently resisting competitive risks from the outside world
Regional economic integration is a powerful international force, which is not only conducive to economic alliances, but also conducive to the formation of strong political and military alliances among the member states of the region, they are united in the external, the use of “one voice to speak”, often can obtain a “magnified” effect.
The euro did not promote further economic integration within the EMU. Although the share of intra-EU trade increased, dissimilarities in economic structure, combined with high degrees of industrial specialisation, increased the EMU’s vulnerability to an asymmetric shock. Moreover, the lack of adjustment tools such as labour mobility or a transfer payment system makes it very costly for the EMU to recover from the current crisis.
Most of the implemented and suggested stabilisation measures attempt to tackle the problem of the eurozone’s high sensitivity to macroeconomic distress by promoting economic integration, fiscal discipline and debt redemption. The establishment of rescue programmes such as the EFSF addresses the EMU’s limited adjustment capability to asymmetric shocks, as these programmes represent a form of transfer payments, even as fully developed fiscal federalism remains highly unlikely. Limited labour mobility amongst European countries, however, appears to be rigid and remains the main obstacle to the EMU’s adjustment capability.
The economic stability loss from foregoing exchange rates and national monetary policies is greater than monetary efficiency gains – especially for European periphery countries. European economic integration is still in its infancy and requires further action to reduce its future cost and thus make the EMU more resistant to macroeconomic disturbances. Awareness of the necessary steps to be taken has slowly grown. Efforts to overcome the current economic crisis will simultaneously improve the EMU’s long-term performance as a currency union.