Is Europe an optimum currency area?: Wage rigidity comparison across countries

Europe has been trying to form an optimum currency area (OCA) since the introduction of the euro. However, many claimed it failed in doing so. The purpose of this thesis is to investigate whether Europe can be called an OCA or not. This is done by comparing the labour flexibility throughout Europe after certain macroeconomic shocks, which were normally processed by the exchange rates. Four countries have been chosen to represent the European Union: Greece, the Netherlands, Spain and the UK. The tests are performed using the ordinary least squares technique. We show that Europe cannot be defined as an OCA, because it fails to respond to shocks as a Union. A significant effect of wages on employment is found, however this alone is not enough. Currently, member states solely react to shocks. Hence, there is still a long way to go to create an optimum currency area.