Troubles in the Euro Area Periphery: The View through the Lens of a Simple Convergence-Sensitive Optimum Currency Area Index

The concept of an optimum-currency-area (or OCA) index has often been used to assess the relative proximity of various pairs of economies to the ideal of an optimum currency area. In this paper, we suggest improving the construction of the index in several ways, primarily by making it sensitive to real income convergence. Estimation for a sample of 31 advanced or late-stage transition economies for the ten-year period prior to the latest financial crisis confirms that the presence of a process of real convergence generally increases the value of the index and thus speaks against adopting a single currency until the convergence process is largely over. Looking specifically at the position of current peripheral euro area member economies, the index indicates relatively low preparedness of Greece and Ireland for a common currency with Germany: in fact, the preparedness of several Central European late-transition economies seems to have been comparable or even better.