The crisis initiated in 2007-2008 has highlighted the sub-optimal nature of the Eurozone as an optimal currency area (OCA), said Bernard Fingleton, Director of research in the Department of Land Economy, University of Cambridge, and laureate of the EIB-ERSA (European Regional Science Association) Prize 2016, at an EIB Institute seminar.
Looked at from the regional perspective, the Eurozone was created without conforming to the ideal of an OCA. However, its very creation could have produced the sought-after convergence. The big test was the 2007 crisis and its aftermath. Simulation of the no-crisis counterfactual indicates significant asymmetry in shocks to employment across EU regions over the period 2008-2011, suggesting that there had been no endogenous movement towards an OCA.
Labour migration and wage flexibility across Europe was not sufficient to moderate the impacts of the shock, said Professor Fingleton. National automatic stabilizers were uncoordinated and, in the absence of an EU wide system of transfers, produced wide regional disparities, he concluded.
Click here for the presentation.