Euro Zone Crisis and Mundell's Theories

Mundell has three achievements that made him renowned around the world: in 1999, he won the Nobel Prize in Economics; he is the Father of the Euro; he proposed the "impossible trinity" theorem. "Impossible Trinity" theorem and different exchange rate regime monetary and fiscal policies in the optimal currency area that is, "Optimum Currency Areas," are two of today's most popular theories. The former is more popular and is widely accepted worldwide. After the theory became popular in Europe, it is the basis for the birth of the euro area, so Mundell was referred to as "Father of the Euro."

Impossible trinity theory is that in the international economic environment, an economy in a fixed exchange rate regime, free capital flows and an independent monetary policy cannot simultaneously satisfied, which means that one entity can only reach a maximum of two objectives. From a common sense point of view this theory is correct. A discussion of today's global economies monetary policy orientation of the field is a basic principle. And many people thought the "impossible trinity" theory and the "optimal currency area" theory is consistent, and that Mondale would be proud of his impossible trinity theory.

In fact, their expectation is wrong. Mundell's "impossible triangle" theory and the "optimal currency area" theory are inherently contradictory, and he did not value the "impossible triangle" theory, while strongly advocating the "optimal currency area" theory. The "impossible triangle" theory's intrinsic idea is floating exchange rate system, while Mondale is behind a fixed exchange rate system. His highest ideal is to a fixed exchange rate system, world currency and world central banks. His "optimal currency area" is a product of the theorem that the euro area is an extreme expression of fixed exchange rates. Therefore, Mondale was in the euro area, before the outbreak of the crisis in Greece, to promote his idea of regional and global common currency, and to justify the fixed exchange rate system. Mundell's "Optimum Currency Areas" Theory and the practice of the euro area, and his around the world justifying of a fixed exchange rate regime and single currency, showed that he actually had given up and denied the "impossible trinity" theory.

However, upon the denial of the "impossible triangle" theorem, chaos is bound as the euro area turned into a living example of the chaos. Because of the euro zone single currency, fixed currency exchange relationship exists in the euro zone (i.e., all member countries are using the euro, equivalent to the ultimate form of fixed exchange rates); because it is the same currency, capital flows between the various member states are without almost no obstacles, the equivalent of full freedom of capital flows; the existence of the European Central Bank causes Member States a complete loss of an independent monetary policy. The trinity in the euro zone is the fixed exchange rate, complete freedom of capital flows and total loss of an independent monetary policy. he combination of member states in fact implemented a fixed exchange rate with the cost of losing independent monetary policies.

In any economic entity, domestic economic policies in any case are always the main monetary and their inevitable impact on the economy is extremely important. Monetary policy is one such extremely important economic policy. The flow of capital will stimulate economies and create changes in the real economy. Exchange rate is only between the two currencies and exchange between a number of comparison only. Therefore, in these three factors, according to the importance of descending order, there is no doubt there should be: monetary policy first, capital flows second and lastly exchange rates.

Thus, an economy should first be completely committed to an independent monetary policy, followed by determining the degree of freedom of capital flows, and finally consider the relationship between the currency exchanges. However, the euro zone is the exact opposite as it views fixed exchange rate as the most important thing, followed by secondary emphasis on the free movement of capital, while completely dumping the independent monetary policy. Therefore, an outbreak of the debt crisis of the euro area is not surprising.