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Optimum Currency Area Theory, Nominal and Real Convergence Controversies and the European Experience After the Recent Global Economic Crisis

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EU Crisis and the Role of the Periphery

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Abstract

The traditional theory of Optimum Currency Areas (OCA) has provided the conceptual explanation of currency unions for nearly half a century and played a dominant role in shaping the idea of the European monetary integration, whereas it further offered a basis for the creation of the eurozone. Nominal convergence, in accordance with the OCA theory, represents the final stage of the process and involves monetary and fiscal variables, while its relationship with real convergence turns out to be complex and insufficiently defined both in contemporary economic theory and empirical research. The emergence of the world economic crisis in 2008 further accentuated the problem of the relation between nominal and real convergence especially following the worsening of the macroeconomic disequilibria of many “old” and “new” member states. This article firstly aims to approach the Optimum Currency Areas theory in its evolution and to underscore its weak points. We shall then consider the criteria and the main suggested methods of estimating real convergence. We shall finally attempt a meta-analysis of the often contradictory results of empirical researches on real convergence, both within the context of the eurozone and the European Union in view of the above mentioned theoretical controversy. Our conclusions lead to skepticism on the evolution of the real convergence process, in particular since the recent global economic crisis erupted.

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Notes

  1. 1.

    Some writers, such as Lerner, Meade and Scitovsky, analyzing in previous decades the effectiveness of interregional adjustments within a country in the Keynesian framework, mentioned some features of the theory of OCA (Cesarano 2006).

  2. 2.

    See notably Friedman (1968) and Phelps (1970).

  3. 3.

    See, for example, Akerlof et al. (2000).

  4. 4.

    For a detailed presentation, see Mongelli (2002).

  5. 5.

    See Schiavo (2008).

  6. 6.

    See Frankel and Rose (1998).

  7. 7.

    Quah (1993b) shows that standard cross-section regression tests which are used by the classical approach to convergence lead to wrong conclusions, suggesting an analogy to the famous Galton’s fallacy.

  8. 8.

    Decision 90/141/EEC.

  9. 9.

    A survey of the existing empirical literature on BS effect for the New Member States is provided in Egert et al. (2006).

  10. 10.

    See also, Jacquelin (2004).

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  1. Department of Balkan, Slavic & Oriental Studies, University of Macedonia, 156 Egnatia str, 540.06, Thessaloniki, Greece

    Georgios Makris

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  1. Eastern Macedonia and Thrace Institute of Technology, Kavala, Greece

    Anastasios Karasavvoglou

  2. Istanbul University, Beyazit - Istanbul, Turkey

    Serdar Ongan

  3. Eastern Macedonia and Thrace Institute of Technology, Kavala, Greece

    Persefoni Polychronidou

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Makris, G. (2015). Optimum Currency Area Theory, Nominal and Real Convergence Controversies and the European Experience After the Recent Global Economic Crisis. In: Karasavvoglou, A., Ongan, S., Polychronidou, P. (eds) EU Crisis and the Role of the Periphery. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-10133-0_4

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