The euro and the European Economic and Monetary Union (EMU) have been flawed since their inception. Even before the EMU was introduced, economists had developed a theory of optimal currency area—specifying which conditions were necessary in order for all members to benefit and for the union to last. In the case of the eurozone, most of these conditions were not satisfied.
The first requirement for an optimal currency area is that labour and capital should be allowed to move freely across countries. Second, prices and wages need to be flexible. Both of these requirements ensure that we are always in an equilibrium because differences in demand and supply in one region can quickly disappear by the movement of capital and labour from other regions. At the same time, the prices of factors and goods adjust everywhere accordingly.
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