are very volatile. policy - makers are not just interested in the growth of gdp, but its variance. large volatile influences are a policy nightmare. the asian experience private capital flow into the five troubled economies of asia ( south korea, indonesia, thailand, malaysia and the philippines ) was very large and variable, both up and down. it had reached almost us $ 100 billion in 1996 - one - third of worldwide flows into emerging countries. this was a five - fold increase over the 1990 - 93 average. it reversed in 1997, to record an outflow of us $ 12 billion. this turnaround was equivalent to more than 10 per cent of the gdp of these countries. portfolio equity investment into these five countries almost quadrupled in a single year - 1993. these flows were huge, compared to the size of the domestic financial sectors. it is hardly surprising that the then - governor of the indonesian central bank said : “ we started building the foundations of a house but suddenly we had to host a party ”. 8 kindleberger ( 1989 ), describing the post - opec period, captures the same point when he says : “ multinational banks swollen with dollars,... tumbled over one another in trying to uncover new foreign borrowers. ” ( p. 26 ) two other characteristics are worth noting : • • almost 60 per cent of the 1996 private flows to the asian five were from foreign commercial banks and 40 per cent were short - term credits. bank lending was flighty indeed - inflows of us $ 56 billion in 1996 turned into outflows of us $ 27 billion in 1997. direct equity investment - which might be expected to be more stable - was quite modest ( 6 per cent of the total ), but portfolio equity investment ( which can - and did - quickly reverse ) was twice as large ; 9 the flows were driven, to an important extent, from the supply side. the flows in the 1990s were consistently larger than the current account deficits - i. e. they were not drawn in by the need to fund the saving / investment gap. paradoxically, one source of volatility was the high profit opportunities available in these countries, as they “ got their economic act together ”, combining technology and cheap labour treasury memo to the uk war cabinet ’ s reconstruction problems committee. proposal for an international monetary fund, annex a of the washington conversations article vii, memorandum by the minister of state, 7 february 1944. bhagwati ( 1998 )

monetary policies and an adjustment in the exchange rate. as the vocal euro - sceptic martin feldstein put it : “ a single monetary policy for a group of heterogeneous countries that experience different shocks cannot be optimal – the problem is that, when it comes to monetary policy, one size cannot fit all. ” ( feldstein 2009 ). if heterogeneous regions do share a common currency, they need alternative adjustment mechanisms like flexible wages, mobile factors, both labour and capital, and fiscal transfers. the better these alternative adjustment mechanisms work, the lower is the cost to go for a common currency. introducing a common currency or joining a monetary union then comes down to comparing the costs with the benefits ( de grauwe 2007 ). in the euro area the bottom line is negative, according to the sceptics. the crucial alternative adjustment mechanisms are too weak, raising the costs of a common currency beyond the expected benefits ( feldstein 1997 ). cut off date for data end of august 2009. this simplistic oca approach has been criticized from several angles. in particular the set - up is static, neglecting the dynamics that the introduction of a common currency sets in motion. in fact, monetary unification is an evolutionary process, where the use of a common currency provokes a number of structural changes in the participating economies. a group of regions that could not be considered an oca ex ante, before the introduction of the common currency, might thus evolve to become an oca ex post ( frankel and rose 1998 ). in fact, intra - euro area trade has increased since the introduction of the euro, rising from a quarter of gdp ten years ago to one third today. available estimates attribute half of this increase to the elimination of exchange rate volatility brought by monetary union ( ec 2008 ). rose argues that more trade means better synchronized business cycles, thus facilitating a common monetary policy. structural breaks are not confined to trade in physical goods. as thanks to the common market trade was already high among today ’ s euro area countries even before the inception of the common currency, the integration of financial markets was probably more important in the case of emu. in fact, there is strong empirical evidence for the boost in financial integration brought by the introduction of the common currency ( ec 2008, lane 2008 ). ideally, integrated financial markets encourage the movement of capital towards its best uses, promote diversification, diminish the risk of local credit