4  An optimum currency area is a region in which labor and capital are internally mobile and sub-regions tend to be affected by similar shocks. As Mundell (1961) first argued, in this situation the shock-absorbing benefits of flexible exchange rates are outweighed by the reduction in transactions costs and in uncertainty provided by fixed exchange rates or a common currency.
5  See, for example, Bayoumi and Eichengreen (1993) and Ghosh and Wolf (1994). 6  European economic integration has been motivated to a significant degree by a desire to make a repeat of the destructive conflicts of the twentieth century impossible.