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Can We Expect Convergence through Monetary Integration? (New) OCA Theory versus Empirical Evidence from European Integration

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  • Helmut Wagner

    () (University of Hagen, Hagen, 58093, Germany.)

Abstract

It is argued that the European Union and the Eurozone in particular are only able to survive if they succeed in avoiding and/or overcoming real divergence and excessive macroeconomic disequilibria. The mainstream view in economics is that a monetary union is only efficient or rather sustainable if either there is a certain degree of structural homogeneity, that is if there has been real (institutional-structural) convergence among the member countries before accession (Optimal Currency Area (OCA) Theory), or – alternatively – this real convergence is going to occur soon after accession (‘endogenous’ convergence hypothesis: New OCA Theory). This paper first presents a theoretical foundation and a discussion of this endogenous convergence hypothesis and then offers an empirical analysis on whether or not such an endogenous real convergence has occurred in the European Monetary Union (EMU). The analysis shows and explains that – and why – after EMU accession several (particularly emerging market) member economies have experienced real divergence instead of the desired/hoped for convergence. Finally, the paper draws some political implications.

Suggested Citation

  • Helmut Wagner, 2014. "Can We Expect Convergence through Monetary Integration? (New) OCA Theory versus Empirical Evidence from European Integration," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 56(2), pages 176-199, June.
  • Handle: RePEc:pal:compes:v:56:y:2014:i:2:p:176-199
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    Cited by:

    1. Helmut Wagner, 2015. "Structural Change and Mid-Income Trap – Under which conditions can China succeed in moving towards higher income status?," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 12(2), pages 165-188, December.
    2. Peter Spahn, 2016. "Central Bank Design in a Non-optimal Currency Union A Lender of Last Resort for Government Debt?," ROME Working Papers 201610, ROME Network.

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