The theory of optimum currency area revisited: Lessons from the euro/dollar competitive currency regimes

This paper presents an analytic paradigm of the euro/dollar competitive currency regimes and relates it to the concept of optimum currency area. It is argued that the competitive value of a currency in the global market depends on the shares of world output and trade it represents. In the post-WWII decades the dollar was the king as it represented competitively very large shares of world output and trade, no other currency regime coming close to it. With the progression of the European Union, leading to Europeanization of Europe, one common economic unit with its well-defined micro-andmacro economic parameters has been placed on the continental geographic unit of Europe. Of course, only 12 of the original 15 EU member economies have voluntarily surrendered their monetary sovereignty to become members of the euro regime. The 3 out-members and the 10 new members have yet to join the euro club. We begin our study with the EU-12 who have adopted euro as their common currency under one common central bank, The European Central Bank (ECB), and extend our analysis to the EU-15 and the EU-25. The euro has progressively become a global currency as its shares of world output and trade have become competitively large. Thus, the euro/dollar competitive currency regimes present a choice of optimum currency areas for the global economy. The concept of geo-economics has replaced the Cold War concept of geo-politics. The European Union is based on the principle of competition and the euro/dollar competitive currency regimes will contribute to the optimization of economic gains for all micro units - households as well as business units - in the two currency regimes and also in the rest of the world. (C) 2005 Elsevier Inc. All rights reserved.