"A Sustainable EU-27 Single Currency? Political Criteria for Optimal currency Areas"

Sadeh, Tal T. (2003) "A Sustainable EU-27 Single Currency? Political Criteria for Optimal currency Areas". In: UNSPECIFIED, Nashville, Tennessee. (Unpublished)

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Abstract

This study tries to find which EU member states and candidate countries can sustain a currency link. I use Bayoumi and Eichengreen’s procedure of two-step least squares cross-section regression analysis for estimating exchange rate variation among 26 European countries, integrating domestic political factors into an Optimal Currency Area analysis framework. Excluding political variables a currency union is found sustainable among combinations of 2-6 countries, none including more than one major EU economy. Economically, Germany is the leading core country, followed by France and the UK. Including political variables Germany and eight other small countries are singled out, while the UK becomes an almost equal alternative core to Germany, with six potential currency partners. Considering domestic politics France and Italy are unstable Euro-zone members. The candidate countries are a long way from a sustainable currency union with the EU.

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