To what Extent are Labour and Capital really mobile within the EU?
Answer:
It's two of the EU's main reasons for existence - or at least the ones its architects and supporters like to talk about, as they're important, and it deflects attention away from the POLITICS behind it all.
Labour mobility is the most important factor in determining optimum currency areas, I think (look up Robert Mundell's work).
Capital is very mobile within the EU, I'm pretty sure.
Labour is mobile insofar as there aren't many thing on paper that stop you going but not many people do. Something like 3% of EU citizens live in a different EU country than the one they were born in. Moving from the UK to France is seen as a huge move, despite the fact there are only 22 miles of water in between them. Moving from LA to NYC, however, isn't seen as a huge move.
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Criteria
The three principal characteristics of an OCA are that there be:
* Labor mobility across the region. This includes physical ability to travel (visas, worker's rights, etc.), lack of cultural barriers to free movement (such as different languages) and institutional arrangements (such as the ability to have superannuation transferred and to the new region).
* Openness with capital mobility and price and wage flexibility across the region. This is so that the market forces of supply and demand automatically distribute money and goods to where they are needed. In practice this does not work perfectly as there is no true wage flexibility.(Ronald McKinnon)
* An automatic fiscal transfer mechanism to redistribute money to areas/sectors which have been adversely affected by the first two characteristics. This usually takes the form of taxation redistribution to less developed areas of a country/region. This policy, though theoretically accepted, is politically difficult to implement as the better-off regions rarely give up their revenue easily.
Additional criteria suggested for the OCA theory are:
* Production diversification (Peter Kenen)
* Homogeneous preferences
* Commonality of destiny
The primary criticism of Mundell's theory is that the only area that has optimal conditions for a single currency is one that already has a single currency. A circular argument. Furthermore many existing currency areas do not fulfill these requirements.
This theory has been most frequently applied in recent years to the Euro and the European Union. By these criteria the European Union does not constitute an Optimal Currency Area and therefore the Euro should not be a successful union of currencies.[citation needed] However it is hoped that the creation of the Euro will in itself help encourage the conditions enumerated by Mundell.
FDI and outsourcing. Look into that.
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