Is the European Union a natural currency area, or is it held together by policy makers?

In 1999, EMU started with 11 members, but with considerable uncertainty about the depth of the convergence between them. The optimal currency area literature stresses the need for shocks which are symmetric and of similar size across countries. Our results show that symmetries in the core are only marginally stronger than those in the periphery; and that these symmetries have been increasingly maintained by policy interventions. Consequently, Europe may evolve into an optimal currency area; but the symmetries will be policy-induced rather than a market phenomenon. This suggests a fragility which could be reflected in the value of the new currency. JEL no. F15, F33, R11.