Recent studies find that short-term fluctuations in EMU have been symmetric. This finding leads to benign views on the functioning of EMU as an optimum currency area (OCA), that are difficult to reconcile with the sovereign debt crisis. We try to solve this puzzle by looking at medium-term fluctuations instead, and reach five conclusions. First, medium-term fluctuations in EMU are much larger and less symmetric than short-term fluctuations. Second, medium-term fluctuations have become larger and less symmetric over time, while short-term fluctuations have become smaller and more symmetric. Third, medium-term fluctuations in EMU are less symmetric than in the US, while short-term fluctuations are more symmetric. Fourth, medium-term fluctuations in the euro area have become more strongly correlated with financial variables like credit and house prices, and less strongly correlated with real variables like productivity. Finally, medium-term fluctuations are more closely related to imbalances in price competitiveness, current accounts and budget deficits than short-term fluctuations. We conclude that our medium-term perspective has become relevant in the monetary union, due to the increasing importance of financial factors. It leads to less benign views on the functioning of EMU and on the endogenous OCA hypothesis.
Keywords: EMU, optimum currency areas, economic fluctuations, financial cycle.
JEL classifications: E44, E58, F36, G15, G21.
Working paper no. 644