International Finance Essay Example | Topics and Well Written Essays - 2000 words

International Finance - Essay Example Every five years EU citizens elect the European Parliament. Other significant EU institutions include the European Commission, the Council of the European Union, the Court of Justice of the European Union, the European Council, and the European Central Bank. Thereby EU has created one market through a uniform system of regulations which apply in all member countries. As a final stage of economic integration of the EU a monetary union (an optimum currency area) was formed. The Economic and Monetary Union (EMU) of 17 EU member states who have accepted the euro (â‚ ¬) as their common currency and solitary legal tender, makes the Eurozone, which is officially known as the euro area. Eurozone currently includes Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Other EU member states are expected to fulfil the strict entry requirements to enter the Eurozone while some EU state s namely Sweden, Denmark and the United Kingdom has chosen to stay outside the Eurozone. European Central Bank carries the responsibility of the monetary policy of the area, whereas other zone/euro related decisions are co-operated through the euro group. Part A and B of this paper will review the case for Eurozone membership in regard of the optimum currency area theory and issues with fixed exchange rate systems respectively. Thereby finally the paper will conclude how the Eurozone membership can be attractive to new applicants. A) Optimum currency area theory in the Eurozone A geographic region which would maximize economic efficiency by the entire region sharing a single currency is known as an optimum currency area (OCA). The earliest mention of the concept was by Abba Lerner (Scitovsky, 1984); although most acknowledged development of the pertaining theory goes to Robert Mundell. Mundell argues that for perfect regional economic integration the said region must be an OCA. Thus he presented two simulations. First was an OCA with fixed expectations: the argument in brief is that uneven shocks are considered to challenge the real economy. These shocks are significant and cannot be organised. Also the international monetary policy (interest rates) cannot be modified for a specific situation of each integral region. Thus a regime with floating exchange rate is considered better than a fixed regime (Mundell, 1961). By this means the properties (Mongelli, 2008) of a successful optimal currency area are reviewed below. Mobility of factors of production including labour. High market integration inside a group of partner countries can lessen the need to modify real factor prices and the nominal exchange rate between countries in reaction to disturbances (Mundell, 1961). The belief that mobility of factors of production enhances both efficiency and welfare was confirmed by the trade theory. Such mobility is likely display its effect in the long-run. The production factors’ mobility is restricted by the speed that direct investment can be generated by one country and absorbed by another. Likewise, labour mobility which includes physical capability to travel (workers' rights, visas, etc.), lack of cultural blocks to free movement (such as different languages and