How the euro zone works: Review of Robert Mundell's criteria

As early as 1961, Robert Mundell defined the three conditions for countries to effectively form an optimal currency area ( the creation of which increases well-being) 1 . 1. Countries must have similar productive specialisations; if not, the shocks they will experience, which are specific to different business sectors, will be asymmetric, which is very negative when there is a single monetary policy. 2. Labour mobility between countries must be high, which prevents countries from maintaining much higher unemployment than others if they are affected by specific negative shocks. 3. Capital mobility between countries must be high, which corresponds to several objectives: taking advantage of the disappearance of currency risk to achieve an efficient allocation of savings in the currency area; easily financing external deficits in some countries by the external surpluses of other countries, if asymmetries give rise to trade imbalances that can no longer be corrected by exchange rates. It must be acknowledged that the euro zone currently does not meet any of Mundell’s three criteria for an optimal currency area, which in reality is serious, and cannot be sufficiently corrected by internal devaluations or fiscal federalism. 1 R. A. Mundell; “A Theory of Optimum Currency Areas”, The American Economic Review, vol. 51, no. 4, 1961.