The Difficult and Costly Options for Saving the Euro: Implications for Jamaica

The acid test of system sustainability comes not when things are going well, but when things are going badly. This is the situation with the Euro Zone (EZ for short) where the current common currency arrangement is failing this test. More to the point, the Euro Zone, as we know it, will be significantly different by the end of calendar 2012. MMThis article on the future of the Euro considers three questions. First, what are the requirements for a sustainable currency area and did the Euro meet them? Second, what can be done to avert a breakup of the EZ? Third, what are the implications for the Caribbean and more specifically, Jamaica?

What is the Euro Zone and is it an Optimum Currency Area? 

The Euro Zone is a common currency area of 17 countries with one currency, the Euro, and with a common central bank, the European Central Bank, (also  known as the ECB). The mandate of the ECB was to maintain price stability in the EZ but it had no authority to act as a lender of the last resort. Now Jamaica and the USA, for example, are common currency areas but unlike the EZ, these currency areas comprise one country with national fiscal and monetary authorities. On the other hand, the EZ includes many nations and no fiscal authority. Is this latter arrangement sustainable? 

This issue comes under the topic of Optimum Currency Areas (OCAs), which may be described simply as ‘the best area to use a single currency’ (Oxford Dictionary of Economics). What are these requirements and does the EZ meet them?

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