The following figure shows some hypothetical OCA criteria with the Eurozone for selected countries. Assume that these are based solely on economic criteria—that is, without reference to other political considerations. Refer to the diagram in responding to the questions that follow.
The figure is the Symmetry Integration Diagram. The horizontal axis is Market integration. The vertical axis is Symmetry of shocks. The decreasing line showing hypothetical O C A criteria is marked. Above the line the points, labeled Slovakia, Denmark, Switzerland, and United Kingdom, are shown. Below the line the points, labeled Poland, Greece, Turkey, are highlighted.
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(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
The figure shows the hypothetical OCA criteria with the Eurozone for selected countries. You are asked to assume that these are based solely on economic criteria—that is, without reference to other political considerations. Refer to the diagram in responding to the questions that follow.
You are asked to identify the countries that satisfy the OCA criteria for joining a monetary union.
(Description)
The graph is shown.
The horizontal axis is labeled Market integration. The vertical axis is labeled Symmetry of shocks.
A straight line sloping downward is drawn on the graph. It is labeled OCA. Dots, labeled with country names, are plotted on the graph.
Dots representing Slovakia, Denmark, Switzerland, and United Kingdom, are plotted above the line.
Dots representing Poland, Greece, and Turkey are plotted below the line.
(Speaker)
According to the figure, Denmark, Slovakia, Switzerland, and the United Kingdom satisfy the OCA criteria. They have relatively high market integration with the EU and also experience symmetric shocks.
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(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
The question will ask you to compare Poland and the United Kingdom in terms of the OCA criteria regarding market integration with the Eurozone. Discuss one possible source of differences in integration with the EU in the two countries.
(Description)
The graph from question 1 is shown. According to the graph, Poland has lower market integration with EU countries relative to the United Kingdom’s market integration with the EU. This could reflect lower trade volumes with the other countries on the graph.
Poland’s lower market integration could reflect access to ports, distance from major trading centers, or a variety of other factors. The United Kingdom has a long history of trading with other EU countries, whereas Poland was aligned with the former Soviet Union both economically and politically (until 1989).
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(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
The question will ask you to compare Poland and the United Kingdom in terms of the OCA criteria regarding symmetric versus asymmetric shocks (relative to the Eurozone). Discuss one possible source of differences in symmetry with the EU in the two countries.
(Description)
The graph from question 1 is shown.
(Speaker)
Poland’s shocks are more symmetric with the EU than those of United Kingdom. This indicates that economic growth rates in Poland are more closely correlated with those in the other EU countries (relative to the United Kingdom).
Possible sources of these differences are in the types of goods and services produced in Poland and the United Kingdom. Relative to the United Kingdom, Poland might be producing more goods and services that are more common in other EU countries. Poland would be producing more manufactured goods, closer in composition to the rest of the EU, while the United Kingdom produces
more services, for example, its financial industry that is based in London.
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(Speaker)
Suppose that policymakers in both Poland and the United Kingdom care only about being able to use policy in response to shocks. You are asked to identify the country more likely to seek membership in the EMU and explain your choice.
(Description)
The graph from question 1 is shown.
(Speaker)
If policymakers care only about the loss of monetary policy autonomy and place no weight on the efficiency gains, Poland would be more likely to join the currency union compared with the United Kingdom. This is because Poland gives up relatively less in forgoing autonomous monetary policy than does the United Kingdom, since Poland's shocks are more symmetric with the EU than the United Kingdom's are. Poland, since it is more likely to experience the same shocks as other Eurozone countries, would therefore give up relatively less than the United Kingdom in forgoing autonomous monetary policy.
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(Speaker)
Consider other costs and benefits not in the diagram, both economic and political. What did the ERM crises reveal about the preferences of the United Kingdom? And why has the United Kingdom sought membership only in the EU without seeking membership in the Eurozone?
(Description)
The graph from question 1 is shown.
(Speaker)
The ERM crisis revealed that the loss of autonomous monetary policy was too costly for the United Kingdom. The British government was unwilling to remain on the exchange rate peg because this would have meant a severe economic contraction.
The United Kingdom's shocks are not as symmetric with the EU and therefore the United Kingdom prefers an independent monetary policy that allows it to handle its economic business cycles independently.
However, being in the EU allows it to benefit both politically and economically from its political and market integration. Not having the euro as the United Kingdom’s currency hurts its trade with the EU to some extent.
But, in the balance, the United Kingdom's policymakers must have realized that the cost of giving up its monetary policy independence far exceeds its benefits from potential increase in trade with the EU countries.
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(Speaker)
Consider other costs and benefits not in the diagram, both economic and political.
What did membership of the Eurozone reveal about the preferences of Greece?
(Description)
The graph from question 1 is shown.
(Speaker)
Greece sought membership despite falling short of the OCA criteria. This indicates that Greece (1) wanted to join the EU for political and cultural reasons and/or (2) Greece believes the OCA criteria are self-fulfilling, especially in terms of increased market integration.