... benefits from membership within the currency area. In this essay I will use what was the European monetary system now the European Single currency to explain each of these, which will in turn answer the second part of this question. Optimal currency areas came about in Robert Mundell's study of demand shocks, He wrote "A theory of Optimum currency areas" in the American Economic Review 1961. As the demand shocks are the main cost of an optimal currency area. This is due to the individual state's loss of control of its monetary policy to control localised and temporary demand shocks, i.e. asymmetric (affects only one of the states). If the states can not cope with these shocks they would have to take effective action for their own economies which if they have loss of control of their monetary policies they would not be able to do, and if they do have ...

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