Vol 14 (2017) - Issue 6

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Brexit and the Future of the Eurozone

The protracted economic crisis in the Eurozone has fuelled demands for a deeper understanding of the dynamics of core and periphery groups of countries in the European Union, in general, and in its Economic and Monetary Union (EMU), in particular. There is now widespread consensus on the shortcomings of the EMU with even the European Commission openly recognising them and proposing as solution the building up of a Genuine EMU. Such extensive agreement on the need for solutions co-exists with deep disagreement on causes. One view is that design flaws deepened imbalances while another is that policy mistakes hindered convergence. One solution that has been proposed is a flexible euro: a two-tier model of a Northern and a Southern Euro where the latter is softer. One tautological way to explain this is that the Southern euro countries would not be part of the core.
A good way to think about the Eurozone’s stability and cohesion (or, the other way around, asymmetry and imbalances) – as well as the consequences of the UK withdrawal from the EU – is through the very notion of optimum currency area (OCA). The larger the number of countries fulfilling criteria that allow them to be classified as core, the stronger the core of the Eurozone, the larger the number of countries with high 'symmetry' (in the scale we created and discuss below), the more stable the Eurozone as a whole should be.