Economics of the EU Essay Example | Topics and Well Written Essays - 2000 words - 2

Economics of the EU - Essay Example Country specific shocks are similar to asymmetric shocks across the European Monetary Union. Their nature is influenced by the economic structures from this area. Varied economic structures increase the probability of the asymmetric shocks. The costs executed by asymmetrical shocks under European monetary union are dependent on the relationship between nominal and real inertia within European countries (Egger et al., 2011, p.115). Various economists have compared seemingly high nominal inertia in the United States labour markets with comparatively little European nominal wage rigidity. As a result, these economists have made conclusions that costs within Europe that cause nominal inertia are not that high. This argument, however, seems to assume nominal rigidity in price context, which may be practically important like inertia in wages. Also, provided nominal rigidity exists, the cost it enacts in restoring actual equilibrium is greatly dependent on its relationship with real inertia in the economy (Bond et al., 2001, p.340). The framework of modern government has improved as a result of the economic exclusion of currency area, which has become essential. This is especially through the imposition of inconvertibility and exchange controls. Given the practical need for stabilization strategies in existing economies, an area required a different currency. If provided with macroeconomic shock, the financial costs of adjustment would be higher compared to those of changing the exchange rates, through changes in price levels and or factor mobility (Houssa, 2008, p.320). For separate currency areas, the case is apparently held well unless the effect of the shock varies with regions, that is, asymmetric. Suppose the impacts on all were similar, then the exchange rate of modifications required for adjustment would also be e qual for all. In this case, separate currencies would be useless since they would have no purpose. Applying the theory of OCA, any two