Euro zone: Let us return to Robert Mundell

In his theory on optimal currency areas in 1961, Robert Mundell highlighted the three conditions that have to be met for it to be optimal for a group of countries to have a single currency : Free movement of capital, to ensure that the disappearance of currency risk enables optimal allocation of savings within the currency area. Since 2010, capital mobility has unfortunately disappeared between euro-zone countries; Free movement of labour and people, to avoid a situation where a single monetary policy leads to a significant dispersion of unemployment rates if the member countries show asymmetries. We know that labour mobility is quite weak between euro-zone countries, which explains the major heterogeneity of employment rates and unemployment rates; Similar productive specialisations, to avoid the appearance of asymmetric shocks that make it difficult to use a single monetary policy, with the idea that many shocks are specific to one business sector. We are now seeing the negative shock hitting Germany because of its specialisation in industry, particularly in automotive, chemicals and capital goods. Unfortunately, the euro zone does not comply with any of Robert Mundell’s criteria to form a currency area.