Grounded in economic and political reality and drawing on both theory and experience, this paper seeks to provide investors with an informed and practical framework for assessment and decision-making.
We start with our political-economy framework of a common currency matrix, within which we locate Economic and Monetary Union (EMU) and several other contemporary and historical exchange-rate arrangements in relation to institutional and political structures.
We then turn to the theory of the optimal currency area (OCA) as a basis for what works and what tends not to work for monetary unions in general and the eurozone (EZ) in particular. We consider the striking parallels between early US history and the EZ crisis and look back to earlier European experiments at monetary union.
Finally, we present a brief history of Europe’s quest for EMU. As the European Parliament acknowledges, the EZ is not an OCA. Moreover, it may never become one. It also lacks many of the key features of other long-lasting currency unions, such as automatic fiscal transfers. On balance, then, as few commentators would dispute, it is in many ways suboptimal.
We therefore endeavour to address a critical question that inevitably arises: what do theory and experience have to offer about whether and how the euro can survive?
- The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
- The opinions expressed are those of the author or Invesco, are based upon current market conditions and are subject to change without notice. This publication does not form part of any prospectus. This document contains general information only and does not take into account individual objectives, taxation position or financial needs. Nor does this constitute a recommendation of the suitability of any investment strategy for a particular investor. Investors should consult a financial professional before making any investment decisions.