On the mark(s): Optimum currency areas in Germany

In the wake of unification, the former GDR became a member of the DM monetary zone. We evaluate whether unified Germany satisfies the criteria defining an optimal monetary area. We conclude that the primary criterion, similarity of shocks, is not satisfied even by the western states, a reflection of the importance of sector-specific relative to geographic shocks coupled with different sectoral structures. Extending this argument, we conclude that the correlation of shocks to the eastern states with western states is also likely to be smalt. A case for monetary unification must, in consequence, be based on political rather than narrowly economic calculations.