In 1961, the economist Robert Mundell published a paper laying out, per the title, “A Theory of Optimum Currency Areas.” In it, he inquired about the appropriate geographic extent of a shared unit of money. Was it the world? A country? Part of a country? A border-spanning region of, say, the western parts of the United States and Canada, with a separate currency circulating in the eastern parts of the two countries?
“It might seem at first that the question is purely academic,” he wrote, “since it hardly seems within the realm of political feasibility that national currencies would ever be abandoned in favor of any other arrangement.” But it was worth considering anyway, in part because “certain parts of the world are undergoing processes of economic integration and disintegration,” and an idea of what an “optimum currency area” would look like could help “clarify the meaning of these experiments.”
Mundell’s paper was published four years after the establishment in 1957 of the European Economic Community, which aimed to more closely integrate European countries economically and politically, and laid the groundwork for a common market that would enable the free movement of goods and people across the region’s borders. Sixteen years ago, in 1999, the euro was adopted as the common currency of 11 European countries; the same year, Mundell won a Nobel Prize in economics in part for his work on optimum currency areas. Fourteen years ago, Greece joined the currency union. Five years ago came the first hints that a debt crisis might force Greece to leave. Today, 19 countries share the euro, but the dominant headlines are more about disintegration than integration, with Greece’s finance minister confirming that the country will miss Tuesday’s deadline to repay a roughly $1.8 billion loan to the International Monetary Fund. Greece’s banks are now closed as it heads into a Sunday referendum on further government spending cuts and tax increases that may determine whether the nation stays in the euro zone. Whatever else the question of optimum currency areas is, it’s not just academic.