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Does Optimal Currency Area theory suggest the need for greater multi-level governance in the Eurozone?

Holly Snaith

Optimal Currency Area theory (OCA) is a body of research that has been highly influential, since its inception in 1961, on the discourse and design of Economic and Monetary Union. In particular, the Convergence Criteria, Stability and Growth Pact and independent European Central Bank all accord with the prescriptions suggested by proponents of OCA as a precondition for currency union. This paper first evaluates the key claims of OCA theory, in order to trace the degree to which debates within OCA have been embedded within the EMU institutions during their creation. I argue that one central aspect of OCA's implications remains unresolved within the Eurozone's economic framework: namely a developed and integrated role for subnational actors within EMU's decision making processes. This reflects a general lack of formalisation of the kind of multi-level processes that frequently happen in practice within currency unions. The final part of this paper goes on to consider how these have already been formed during the financial crisis, and whether a greater role for formal multi-level negotiation is likely to prove necessary to the future stability of the Euro.

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