The Role of Heterogeneity in Creating Imbalances in the Euro Area

The aim of this paper is to assess the importance played by economic divergences in the current crisis of the euro area. Since the introduction of the single currency there were many debates regarding the heterogeneity of the countries that adopted it. Heterogeneity represents an impediment for the smooth adjustment in the event of asymmetric shocks. The optimal currency theory was the first to present the adjustment mechanisms. In order to quantify the influence of structural diversity on the disturbances in the euro area, we have analyzed the evolution of standard deviation for some of the key indicators. This study will provide a clear understanding of the factors that caused imbalances in the euro area. It is common to draw conclusions upon isolated factors that led to the present financial crisis and to find extreme solutions like the collapse of the monetary union in Europe. This article shows that analyzing the structure of the union gives an appropriate understanding of the mistakes that have been made.