A study on a new fiscal risk‐sharing system to make Eurozone an OCA

This article seeks to add a new element to the 5‐decade debate over the theory of Optimal Currency Area. In the euro area, the accumulation of economic imbalances caused by the loss of the automatic adjustment functions of the exchange rate have served as a structural background to limit its self‐sustaining resilience during financial shocks. To enhance the stability of Optimal Currency Area (OCA) through the revitalization of those functions, this article argues that if the euro area had adopted some form of fiscal risk‐sharing mechanisms, which could have generated a similar economic effect as if they had maintained a flexible F/X system as that which had existed in pre‐euro days, the fiscal crisis hypothetically could have been more easily overcome within a shorter period with less financial support. The result suggests that if ‘Adjustment Fund for Foreign Exchange rate Loss (AFFEL)’, originally devised within these pages, had operated, the interest rates in crisis‐hit members could have been significantly lower than actual levels during the crisis, while safely maintaining the euro system.