Critics of the Economic Monetary Union argued that the requirements that allowed member states to enter into the Eurozone were not stringent enough based offed the Maastricht Treaty and Stability Pact. The argument a lot of critics took up was that nominal convergence was not efficient enough to produce a single monetary union in which individual economies with different structures could be stable in the event of economic shock. Britain for example argued that “’the results of the integration of markets, the situation and development of the balances of payments on current account and an examination of the development of unit labour costs and other price indexes’ [should] be taken into account when assessing progress towards convergence,” (Harvie, 9). If countries were to adopt a single fixed exchange rate in which they had no control over, there was always the threat of an economic shock in which countries effectiveness at solving would be limited to alternative adjustment mechanisms. For example, if an economic shock does not have a
Criticism of the System
symmetrical effect across the entire Eurozone area, it would be conducive to look for ways to remove the asymmetrical effects so that one country does not weaken the Eurozone. The argument to solve this issue was to require the existence of other certain characteristics before joining the Eurozone. These characteristics can be identified in real economic indicators such as labor market performance, trade balances in goods and services, investment/GDP ratios and housing market structure.
To better understand the European Debt Crisis, a discussion on whether the Eurozone fits the criteria as an Optimal Currency Area prescribed by the characteristics of Optimal Currency Theory put forth by Robert Mundell should first be introduced. This discussion will provide the basis of the current flaws in the Eurozone and give a footing for the problems exemplified in Greece. According to Mundell’s theory, Optimal Currency Area should have adequate labor mobility throughout the area. While the European Union allows for the easy mobility of people throughout the area (no border checks), at least in the Schengen Zone, it fails to meet the criteria of a common languages and culture along with ease of transfer for government benefits from one area to another. Additionally, an Optimal Currency Area should have capital mobility and price and wage mobility. The European Union does fit this characteristic. However, the European Union fails the last two criteria of a currency risk-sharing system across countries (as will be discussed later in a discussion on the European sovereign debt crisis) and similar business cycles across geographical areas (Investopedia). It is these failures of this theory that allowed the for an exaggerated European debt crisis.