Risks of a common currency:

A common currency is only beneficial to countries that belong to the same optimum currency area, that is, to countries that:

• Have great mobility of resources (capital and labor) among themselves.
• Are structurally similar (follow the same business cycles -short and long waves)
• Can closely coordinate their fiscal, monetary, and other policies.

The success of the European Monetary Union (EMU) faces a number of potential risks:

• Although capital already moves freely among EMU member nations, labor can face difficulties for cultural reasons (language, primarily.)
• Even though EMU member nations have strong trade and financial relations among themselves their sequencing of expansions and recessions (business cycles) differs, so requiring contradictory monetary and fiscal policies in different regions within the union.
• Monetary policy is coordinated "de facto" because the ECB (European Central Bank) will control the money supply for the EMU. Fiscal policy at a pan-European level, on the other hand, has yet to be developed.

For more information on optimum currency areas see: "International Economics - 7e," Dominick Salvatore, John Wiley and Sons (2001.)

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