Robert Mundell’s original sin: A Theory of Optimum Currency Areas (1961) American Economic Review 51, 509-517

Robert Mundell is obviously the greatest economist Canada has ever had. However, he committed the original sin when he supported the creation of the Eurozone against the theory he himself initially developed in the 1960s. Read this classic article if you want to know his argument: A Theory of Optimum Currency Areas. (http://www.columbia.edu/~ram15/ie/ie-12.html#1) According to him, an optimum currency area is where perfect labour mobility exists within the area and does not exist across areas. In that area, the use of common currency would be desirable because uncertainty of currency conversion and exchange costs will be eliminated in the environment where a lot of transactions occur between regions. If one region in the area is in boom and the other has high unemployment, people will move from the unemployed region to the inflation region, or the inflation region will buy stuff from the region with the lower prices. If other things remain the same, it would be ridiculous for those two regions to have different currencies. Let’s apply this insight to the Eurozone. As far as I know, there is no common language in Europe. A lot of international conferences are held in English or French, but when it comes to ordinary workers, a lot of Italian, Spanish, or Greek workers do not speak English or French in working environment. Scandinavians speak English very well (some of them are better than Canadians), but they have not joined the Eurozone, except Finland. Definitely, Southern Europeans, who have mass unemployment, cannot migrate to other Eurozone nations to find jobs. Europe is not an optimum currency area, but Mundell supported euro when it was introduced and now he is silent at this miserable situation. It is an academic sin.