The Revenge of the Optimum Currency Area

This thesis aims to show what impact the sovereign debt crisis has had on the European Union, in particular the European Monetary Union (EMU), and to what policy reforms that crisis has led. The recent policy reforms have been used to research the institutional setup of the Economic and Monetary Union. The policy reforms that have resulted from the sovereign debt crisis have been assessed against the background of three variables:: the institutional design of the EMU, the degree in which the EMU is an Optimal Currency Area and the degree of policy convergence within the EMU. This thesis shows that the sovereign debt crisis revealed shortcomings in the institutional setup of the EMU. Furthermore, the crisis produced an asymmetric shock as defined by the Theory of Optimal Currency Areas. In fact, according to that theory, the EMU cannot be called an ‘Optimal’ Currency Area. Moreover, no sign of pre-crisis policy convergence has been found. Countries which adopted the Euro as their currency have not converged since the start of the third phase of the EMU. This thesis will show that the sovereign debt crisis has revealed flaws in the institutional design of the EMU, which created the need for urgent policy reforms.