Open main menu

A currency union (also known as monetary union) is an intergovernmental agreement that involves two or more states sharing the same currency. These states may not necessarily have any further integration (such as an economic and monetary union, which would have, in addition, a customs union and a single market).

Three types of currency unions exist:

  1. Informal – unilateral adoption of foreign currency[1]
  2. Formal – adoption of foreign currency by virtue of bilateral or multilateral agreement with the issuing authority, sometimes supplemented by issue of local currency in currency peg regime
  3. Formal with common policy – establishment by multiple countries of a common monetary policy and issuing authority for their common currency

The theory of the optimal currency area addresses the question of how to determine what geographical regions should share a currency in order to maximize economic efficiency.

Contents

Advantages and disadvantages of currency unionsEdit

Implementing a new currency in a country is always a controversial topic because it has both many advantages and disadvantages. New currency has different impacts on businesses and individuals, which creates more points of view on the usefulness of currency unions. As a consequence, governmental institutions often struggle when they try to implement a new currency, for example by entering a currency union.

AdvantagesEdit

  • A currency union helps its members strengthen their competitiveness in a global scale and eliminate the exchange rate risk.
  • Transactions among member states can be processed faster and their costs decrease, fees to banks are lower as a single currency is used.
  • Prices are more transparent and therefore easier to compare. That supports fair competition.
  • The possibility of monetary crisis is lower. The more countries there are in the currency union, the more resistant to crisis they are together.

DisadvantagesEdit

  • The member states lose their sovereignty in monetary policy decisions. There is usually an institution (such as Central Bank) that takes care of the monetary policy making in the whole currency union.
  • The risk of assymetric "shocks" may occur. The criteria set by the currency union are never perfect, so a group of countries might be substantially worse off while the others are booming.
  • Implementing a new currency causes high financial costs. Businesses and also single persons have to adapt to the new currency in their country, which includes costs for the businesses to prepare their management, employees, and they also need to inform their clients and process plenty of new data.
  • The unlimited capital movement may cause moving most resources to the more productive regions at the expense of the less productive regions. The more productive regions tend to attract more capital in goods and services, while the less productive regions might be missing those.[2][3]

Convergence and divergenceEdit

Convergence in terms of macroeconomics means that countries have a similar economic behaviour (similar inflation rates and economic growth). It is easier to form a currency union for countries with more convergence as these countries have the same or at least very similar goals. The European Monetary Union (EMU) is a contemporary model for forming currency unions. Membership in the EMU requires that countries follow a strictly defined set of criteria (the member states are required to have specific rate of infaltion, government deficit, government debt, long-term interest rates and exchange rate). Many other unions have adopted the view that convergence is necessary, so they now follow similar rules to aim the same direction. Divergence is the exact opposite of convergence. Countries with different goals are very difficult to integrate in a single currency union. Their economic behaviour is completely different, which may lead to disagreements. Divergence is therefore not optimal for forming a currency union. [4]

History of currency unionsEdit

The first currency unions existed already in the 19th century. The German Zollverein was one of the first attempts to form a currency union. At the beginning of the 19th century, the fragmented states of the German Confederation agreed on common policies in order to increase trade and political unity. The Latin Monetary Union was formed in 1865, when France, Belgium, Italy, Switzerland and Greece decided to enter into a currency union. Coins of each country were made legal tender and freely interchangeable across the area. Because of the success of the union other states joined later informally. The Scandinavian Monetary Union was established in the 1870s by Sweden, Denmark and Norway. They used a currency based on gold. The system was dissolved by Sweden in 1924.[5]

List of currency unionsEdit

ExistingEdit

Currency Union Users Est. Status Population GDP (nominal $)
CFA franc Issued by the (French) Overseas Issuing Institute between 1945−1962 then by the Central Bank of West African States and the Bank of Central African States   Benin
  Burkina Faso
  Côte d'Ivoire
  Guinea-Bissau
  Mali
  Niger
  Senegal
  Togo
  Cameroon
  Central African Republic
  Chad
  Republic of the Congo
  Equatorial Guinea
  Gabon
1945 Formal, common policy 151,978,440
CFP franc Issued by the (French) Overseas Issuing Institute   French Polynesia
  New Caledonia
  Wallis and Futuna
1945 Formal, common policy 552,537
Eastern Caribbean dollar Eastern Caribbean Currency Union of the OECS   Anguilla
  Antigua and Barbuda
  Dominica
  Grenada
  Montserrat
  Saint Kitts and Nevis
  Saint Lucia
  Saint Vincent and the Grenadines
1965 Formal, common policy
de facto EMU for CSME members[6]
625,000
Euro International status and usage of the euro   Eurozone:

  Austria
  Belgium
  Cyprus
  Estonia
  Finland
  France
  Germany
  Greece
  Ireland
  Italy
  Latvia
  Lithuania
  Luxembourg
  Malta
  Netherlands
  Portugal
  Slovakia
  Slovenia
  Spain


and EU special territories:
  Akrotiri and Dhekelia (SBAs)
  French Southern and Antarctic Lands
  Saint Barthélemy
  Saint Martin
  Saint Pierre and Miquelon


  Andorra
  Kosovo
  Monaco
  Montenegro
  San Marino
   Vatican City

1999/2002 Formal, common policy and EMU for EU members
Formal for Monaco and SBAs (those form a de facto EMU with the Eurozone)
Formal for Andorra since 2011
Informal for Kosovo, Montenegro
Formal for the rest
341,008,867
Hong Kong dollar   Hong Kong

  Macau

1977 Informal; Decreto-Lei n.º 16/95/M prohibiting the refusal of the pataca by merchants and businesses.[7] 7,775,200
Singapore dollar

Brunei dollar

Managed together by the Monetary Authority of Singapore   Brunei

  Singapore

1967 Formal; currencies mutually exchangeable[8] 5,137,000 3.6438×10^10
Australian dollar   Australia

and external territories:
  Ashmore and Cartier Islands
  Australian Antarctic Territory
  Christmas Island
  Cocos (Keeling) Islands
  Coral Sea Islands
  Heard Island and McDonald Islands
  Norfolk Island


  Kiribati
  Nauru
  Tuvalu

1966 Informal 24,557,000
Pound sterling Sterling area (former)   United Kingdom

and overseas territories:
  British Antarctic Territory
  British Indian Ocean Territory
  Falkland Islands
  Gibraltar
  Saint Helena, Ascension and Tristan da Cunha
  South Georgia and the South Sandwich Islands


and crown dependencies:
  Guernsey
  Isle of Man
  Jersey

1939 Semi-formal. UK banknotes are legal tender in locations outside the UK. Local currencies are pegged to the GBP but not necessarily accepted in the UK: Guernsey pound, Manx pound, Jersey pound and Alderney pound, Falkland Islands pound, Gibraltar pound, Saint Helena pound 62,321,000
Indian rupee   India

  Bhutan[9]
    Nepal[10]

1974 Informal

Nepal minor usage

1.215083×10^9
New Zealand dollar   New Zealand

and realm:
  Cook Islands
  Niue


  Pitcairn Islands

1967 Informal 4,411,000
Israeli new sheqel   Israel

  Palestine

1927/1986 Informal 11,738,000
Jordanian dinar[11][12]   Jordan

  Palestine (West Bank only)

Informal 8,922,000
Russian ruble   Russia

  Abkhazia
  South Ossetia

2008 Informal 142,177,000
South African rand Multilateral Monetary Area   Lesotho

  Namibia
  South Africa
  Eswatini

1974 Formal
de facto customs and monetary union for SACU members
52,924,669 3.16936×10^11
Swiss franc   Liechtenstein

   Switzerland

1920 Informal
de facto economic and monetary union — 1924 creation of a customs union, then members of the European Free Trade Association (a common market), and now also part of the European Single Market.
8,547,015 6.8443×10^11
Turkish lira   Turkey

  Turkish Republic of Northern Cyprus

1983 Informal 75,081,100 734,043
United States dollar   United States

and insular areas:
  American Samoa
  Guam
  United States Minor Outlying Islands
  Northern Mariana Islands
  Puerto Rico
  United States Virgin Islands


  Ecuador
  El Salvador
  Panama
  Marshall Islands
  Federated States of Micronesia
  Palau
  Timor-Leste
  Turks and Caicos Islands
  British Virgin Islands
  BES islands

1904

(Panama only)

Formal for insular areas and sovereign status with Compact of Free Association,[13] informal for other areas 339,300,000

Note: Every customs and monetary union and economic and monetary union also has a currency union.

  Zimbabwe is theoretically in a currency union with four blocs as the South African rand, Botswana pula, British pound and US dollar freely circulate, the US Dollar was until 2016 official tender. [1].

 
Currency unions

Additionally the autonomous and dependent territories, such as some of the EU member state special territories, are sometimes treated as separate customs territory from their mainland state or have varying arrangements of formal or de facto customs union, common market and currency union (or combinations thereof) with the mainland and in regards to third countries through the trade pacts signed by the mainland state.[14]

Currency union in EuropeEdit

The European currency union is a part of the Economic and Monetary Union of the European Union (EMU). EMU was formed during the second half of the 20th century after historic agreements, such as Treaty of Paris (1951), Maastricht Treaty (1992). In 2002, Euro, a single European currency, was adopted by 12 member states. Currently, the so called Eurozone has 19 member states. The other members of the European Union must adopt the Euro as their currency (with exceptions, such as the UK and Denmark), but there has not been a specific date set. The main independent institution responsible for stability of the Euro is the European Central Bank (ECB). Together with 15 national banks it forms the European System of Central Banks. The Governing Board consists of the Executive Comitee of the ECB and the governors of individual national banks, and determines the monetary policy, as well as short-term monetary objectives, key interest rates and the extent of monetary reserves.[15]

PlannedEdit

Community Currency Region Target date Notes
Bolivarian Alternative for the Americas SUCRE Latin America
/Caribbean
? It is planned to begin as an electronic currency involving all countries of the Bolivarian Alliance for the Americas.
East African Community East African shilling Africa 2012 (not met), 2015 (not met), 2024[16]
West African Monetary Zone Eco Africa 2020[16] Inside Economic Community of West African States, planned to eventually merge with West African franc
ASEAN+3 Asian Monetary Unit[citation needed] Asia ? a free trade agreements matrix partially established
Cooperation Council for the Arab States of the Gulf Khaleeji Arabian Peninsula c. 2013-2020[17][18] Oman and the United Arab Emirates do not intend to adopt the currency at first but will do at a later date.
African Economic Community Afro or Afriq Africa 2028[19] Planned for 2028 or later

DisbandedEdit

Never materializedEdit

  • proposed pan-American monetary union – abandoned in the form proposed by Argentina
  • proposed monetary union between the United Kingdom and Norway using the pound sterling during the late 1940s and early 1950s
  • proposed gold-backed, pan-African monetary union put forward by Muammar Gaddafi prior to his death

See alsoEdit

ReferencesEdit

  1. ^ "World Bank" (PDF). WorldBank.org. Retrieved 30 April 2019.
  2. ^ "Study". Study.com. Retrieved 30 April 2019.
  3. ^ "Global Financial Integrity". gfintegrity.org. Retrieved 30 April 2019.
  4. ^ Enoch, Charles; Krueger, Russell. "Currency unions: key variables, definitions, measurement, and statistical improvement" (PDF). Bank for International Settlements. Retrieved 30 April 2019.
  5. ^ "History of currency unions". The Guardian. Retrieved 30 April 2019.
  6. ^ Anguilla and Montserrat are members of OECS currency union, but not of the CSME.
  7. ^ http://www.marcasepatentes.pt/files/collections/pt_PT/1/2/14/CPI%201995.pdf Decreto-Lei n. 16/95/M
  8. ^ To all intents and purposes a monetary union. They are the last two nations whose dollars have remained at par and mutually interchangeable since the days when the Spanish Dollar was the united currency of large areas of the New World and South East Asia.
  9. ^ alongside the ngultrum
  10. ^ Not official, but freely used as a tender in Nepal, due to primarily the economic flux with India and also the instability caused by that country's civil war.
  11. ^ Zacharia, Janine (2010-05-31). "Palestinian officials think about replacing Israeli shekel with Palestine pound". The Washington Post, Times Herald (1959-1973). ISSN 0190-8286. Retrieved 2018-08-22.
  12. ^ Cobham, David (2004-09-15). "Alternative currency arrangements for a new Palestinian state" (PDF). In David Cobham (ed.). The Economics of Palestine: Economic Policy and Institutional Reform for a Viable Palestine State. London: Routledge. ISBN 9780415327619. Retrieved 2018-08-22.
  13. ^ "Compact- Title 02 Article 05". www.fsmlaw.org.
  14. ^ EU Overseas countries and some other territories participate partially in the EU single market per part four of the Treaty Establishing the European Community; Some EU Outermost regions and other territories use the Euro of the currency union, others are part of the customs union; some participate in both unions and some in neither.
    Territories of the United States, Australian External Territories and Realm of New Zealand territories share the currency and mostly also the market of their respective mainland state, but are generally not part of its customs territory.
  15. ^ "European Union". Europa.eu. Retrieved 30 April 2019.
  16. ^ a b Asongu, Simplice; Nwachukwu, Jacinta; Tchamyou, Vanessa (2016-08-01). "A Literature Survey on Proposed African Monetary Unions" (PDF). Journal of Economic Surveys. 31 (3): 878–902. doi:10.1111/joes.12174. ISSN 1467-6419.
  17. ^ "Kuwait sees GCC currency union taking up to 10 years". arabianbusiness.com. Archived from the original on 2010-03-03. Retrieved 2010-12-10.
  18. ^ www.dunatv.hu ‹See Tfd›(in Hungarian)
  19. ^ "A common currency at a later stage of Africa's economic integration".
  20. ^ a b Bolton, Sally (10 December 2001). "A history of currency unions". guardian.co.uk. Retrieved 26 February 2012. France persuaded Belgium, Italy, Switzerland and Greece
  21. ^ Not currently on any political agenda, based mostly off conspiracy theories.

Further readingEdit

External linksEdit