what is optimum currency area oca theory 
optimum currency area theory oca states that specific areas not bounded by national borders would benefit from a common currency in other words geographic regions may be better off using the same currency instead of each country within that geographic region using its own currency understanding optimum currency area oca theorysharing a currency can benefit a geographic region by significantly increasing trade however this trade must outweigh the costs of each country giving up a national currency as an instrument to adjust monetary policy areas using oca theory can still maintain a flexible exchange rate system with the rest of the world oca theory was developed in 1961 by canadian economist robert mundell based on earlier work by abba lerner it speculates that there is an optimum geopolitical area that should share a currency but this geopolitical area doesn t necessarily correspond with national borders an optimum currency area could be several nations parts of several nations or regions inside a single nation 1according to the theory a common currency can maximize economic efficiency provided that the participants meet the following four criteria 3princeton professor and international economist peter kenen suggested the addition of a fifth criterion of production diversification within the geopolitical area 4the u s as an optimum currency areasome economists argue that the united states should be divided into several smaller currency areas as the country as a whole does not fit the criteria listed in mundell s original oca theory economists have calculated that the southeast and southwest regions of the united states do not necessarily fit with the rest of the country as an oca 5example of the oca theorymany point to the euro as proof of oca theory in action however some argue that the area did not meet the four criteria as laid out by mundell s theory at the time of the euro s creation in 1999 this lack of meeting the requirements they say is the reason the eurozone has struggled since its inception indeed the oca theory was put to the test in 2010 as sovereign debt issues faced by many heavily indebted nations in europe threatened the viability of the european union eu placing severe strains upon the euro 4according to global financial integrity a non profit located in washington d c peripheral eu countries such as portugal italy ireland greece and spain piigs experienced slowing growth lacked international competitiveness and possessed a labor force that was unproductive 6as these economies slowed private capital fled some to stronger eurozone economies and some to other countries also due to language culture and distance difficulties the labor force in the eurozone is not fluid or mobile wages are not uniform across the geopolitical area either 6