Currency union
Template:Short descriptionTemplate:Trade bloc
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).
There are three types of currency unions:
- Informal – unilateral adoption of a foreign currency.[1]
- Formal – adoption of foreign currency by virtue of bilateral or multilateral agreement with the monetary authority, sometimes supplemented by issue of local currency in currency peg regime.
- Formal with common policy – establishment by multiple countries of a common monetary policy and monetary 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.[2]
Advantages and disadvantages
Template:More citations needed section 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.
Advantages
- A currency union helps its members strengthen their competitiveness on a global scale and eliminate the exchange rate risk.
- Transactions among member states can be processed faster and their costs decrease since fees to banks are lower.[3]
- Prices are more transparent and so are easier to compare, which enables fair competition.
- The probability of a monetary crisis is lower. The more countries there are in the currency union, the more they are resistant to crisis.
Disadvantages
- The member states lose their sovereignty in monetary policy decisions. There is usually an institution (such as a central bank) that takes care of the monetary policymaking in the whole currency union.
- The risk of asymmetric "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.
- 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, which might avoid the less productive regions.[4][5]
Convergence and divergence
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 a specific rate of inflation, 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.[6]
History
The first currency unions were established in the 19th century. The German Zollverein came into existence in 1834, and by 1866, it included most of the German states. The fragmented states of the German Confederation agreed on common policies to increase trade and political unity.
The Latin Monetary Union, comprising France, Belgium, Italy, Switzerland, and Greece, existed between 1865 and 1927, with coinage made of gold and silver. Coins of each country were legal tender and freely interchangeable across the area. The union's success made other states join informally.
The Scandinavian Monetary Union, comprising Sweden, Denmark, and Norway, existed between 1873 and 1905 and used a currency based on gold. The system was dissolved by Sweden in 1924.[7]
A currency union among the British colonies and protectorates in Southeast Asia, namely the Federation of Malaya, North Borneo, Sarawak, Singapore and Brunei was established in 1952. The Malaya and British Borneo dollar, the common currency for circulation was issued by the Board of Commissioners of Currency, Malaya and British Borneo from 1953 until 1967. Following the cessation of the common currency arrangement, Malaysia (the combination of Federation of Malaya, North Borneo, Sarawak), Singapore and Brunei began issuing their own currencies. Contemporarily, a currency reunion of these countries might still be feasible based on the findings of economic convergence.[8][9]
List of currency unions
Existing
Note: Every customs and monetary union and economic and monetary union also has a currency union.
Template:Country data 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.[17]
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.[18]
Currency union in Europe
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, the euro, a single European currency, was adopted by 12 member states. Currently, the Eurozone has 20 member states. The other members of the European Union are required to adopt the euro as their currency (except for Denmark, which has been given the right to opt out), 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). The Eurosystem groups together the ECB and the national central banks (NCBs) of the Member States whose currency is the euro. The European System of Central Banks (ESCB) is made up of the ECB and the national central banks of all Member States of the European Union (EU), regardless of whether or not they have adopted the euro. The Governing Board consists of the Executive Committee 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.[19]
Planned
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| Community | Currency | Region | Target date | Notes |
|---|---|---|---|---|
| Template:Flagicon East African Community | East African shilling | Africa | 2012 (not met), 2015 (not met), 2024 (not met),[20] 2031[21] | |
| West African Monetary Zone | Eco | Africa | 2027 | Inside Economic Community of West African States, planned to eventually merge with West African franc |
| ASEAN+3 | Asian Monetary Unit Script error: No such module "Unsubst". | Asia | ? | a free trade agreements matrix partially established |
| Template:Flagicon image Cooperation Council for the Arab States of the Gulf | Khaleeji | Arabian Peninsula | ? | Oman and the United Arab Emirates do not intend to adopt the currency at first but will do at a later date. |
| Template:Flagicon image African Economic Community | Afro or Afriq | Africa | 2028[22] | Planned for 2028 or later |
| Brazil, Argentina and possibly other countries | Sur | Latin America | ? | As Financial Times reports, Brazil and Argentina will announce in January 2023 that they are starting preparatory work on a common currency "Sur" (South). The initiative would later be extended to invite other Latin American nations.[23] |
Disbanded
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- between Template:Flagicon Bahrain and Template:Flagicon Abu Dhabi using the Bahraini dinar
- between Template:Flagicon Bahrain, Template:Flagicon Kuwait, Template:Flagicon image Oman, Template:Flagicon Qatar and the Template:Flagicon Trucial States, using the Gulf rupee from 1959 until 1966
- between Template:Flagicon image Aden, Template:Country data South Arabia, Template:Flagicon Bahrain, Template:Flagicon image Kenya, Template:Flagicon Kuwait, Template:Flagicon image Oman, Template:Flagicon Qatar, Template:Flagicon British Somaliland, Template:Flagicon the Trucial States, Template:Flagicon image Uganda, Template:Flagicon image Zanzibar and Template:Flagicon British India (later independent Template:Flagicon India) using the Indian rupee until 1974
- between Template:Flagicon Belgium and the Template:Flagicon Grand-Duchy of Luxemburg (Belgium-Luxembourg Economic Union) using the Belgian/Luxembourgish franc from 1921 to the Euro
- between Template:Flagicon British India and the Template:Flagicon Straits Settlements (1837–1867) using the Indian rupee
- between Template:Flagicon Czech Republic and Template:Flagicon Slovakia (briefly from January 1, 1993 to February 8, 1993) using the Czechoslovak koruna
- between Template:Flagicon Ethiopia and Template:Flagicon Eritrea using the Ethiopian birr
- between Template:Flagicon France, Template:Flagicon Monaco, and Template:Flagicon Andorra using the French franc
- between Template:Flagicon Austria-Hungary and Template:Flagicon Liechtenstein using the Austro-Hungarian krone
- between the Eastern Caribbean, Template:Flagicon image Jamaica, Template:Flagicon image Barbados, Template:Flagicon image Trinidad and Tobago and Template:Flagicon British Guiana using the British West Indies dollar
- between the Eastern Caribbean, Template:Flagicon image Barbados, Template:Flagicon image Trinidad and Tobago and Template:Flagicon British Guiana using the Eastern Caribbean dollar
- between Template:Flagicon Italy, Template:Flagicon Vatican City, and Template:Flagicon San Marino using the Italian lira
- between Template:Flagicon Jamaica and the Template:Flagicon Cayman Islands using the Jamaican pound and later Jamaican dollar
- between Template:Flagicon image Kenya, Template:Flagicon image Uganda, and Template:Flagicon image Zanzibar using the East African rupee
- between Template:Flagicon image Kenya, Template:Flagicon image Uganda, and Template:Flagicon image Zanzibar (and later Template:Country data Tanganyika) using the East African florin
- between Template:Flagicon Kenya, Template:Country data Tanganyika and Template:Flagicon Zanzibar (later merged as Template:Flagicon Tanzania), Template:Flagicon Uganda, Template:Flagicon South Arabia, Template:Flagicon British Somaliland and Template:Flagicon image Italian Somaliland using the East African shilling
- Latin Monetary Union (1865–1927), initially between Template:Flagicon France, Template:Flagicon Belgium, Template:Flagicon Italy and Template:Flagicon Switzerland, and later involving Template:Flagicon Greece,[24] Template:Flagicon Romania, Template:Country data Spain and other countries.
- between Template:Flagicon Liberia and the Template:Flagicon United States using the United States dollar
- between Template:Flagicon Mauritius and Template:Flagicon Seychelles using the Mauritian rupee
- between Template:Flagicon image Nigeria, Template:Flagicon image the Gambia, Template:Flagicon image Sierra Leone, Template:Flagicon the Gold Coast and Template:Flagicon Liberia using the British West African pound
- between Template:Flagicon Prussia and the North German states (1838–1857) using the North German thaler
- between Template:Flagicon Russia and the Template:Flagicon image former Soviet republics (1991–1993) using the Soviet ruble
- between Template:Flagicon Qatar and all the emirates of the Template:Flagicon United Arab Emirates, except Abu Dhabi using the Qatari and Dubai riyal
- between Template:Flagicon Saudi Arabia and Template:Flagicon Qatar using the Saudi riyal
- between Template:Flagicon image Western Samoa and Template:Flagicon New Zealand using the New Zealand pound
- Scandinavian Monetary Union (1870s until 1924), between Template:Flagicon Denmark, Template:Flagicon Norway and Template:Flagicon Sweden[24]
- between the Template:Flagicon Solomon Islands, Template:Flagicon Papua New Guinea and Template:Flagicon Australia using the Australian dollar
- between Template:Flagicon Australia, Template:Flagicon image Papua, Template:Flagicon image New Guinea, Template:Flagicon image Nauru, Template:Flagicon image the Solomon Islands, and Template:Flagicon image the Gilbert and Ellice Islands using the Australian pound
- between Template:Flagicon image Bavaria, Template:Flagicon image Baden, Template:Flagicon image Württemberg, Template:Flagicon image Frankfurt, and Template:Flagicon image Hohenzollern using the South German guilder
- between Template:Flagicon Spain and Template:Flagicon Andorra using the Spanish peseta
- between Template:Flagicon Trinidad and Tobago and Template:Flagicon Grenada using the Trinidad and Tobago dollar
- between Template:Flagicon Brunei, Template:Flagicon Malaysia, and Template:Flagicon Singapore (1953–1967) using the Malaya and British Borneo dollar
- between Template:Flagicon image Cambodia, Template:Flagicon image Laos, Template:Flagicon image Guangzhouwan, Template:Flagicon image Annam, Template:Flagicon image Tonkin, and Template:Flagicon image Cochinchina (later Template:Flagicon Vietnam) between 1885 and 1952 using the French Indochinese piastre
- between Template:Country data South Africa, Template:Flagicon South West Africa, and Template:Flagicon image Bechuanaland (later independent Template:Flagicon Botswana) using the South African rand
- between Template:Flagicon Egypt, Template:Flagicon image Anglo-Egyptian Sudan, and Template:Flagicon image Mandatory Palestine (until 1926) using the Egyptian pound
- between Template:Flagicon West Germany and Template:Flagicon East Germany between 1 July 1990 and 3 October 1990, as part of a temporary, so-called "Monetary, Economic and Social Union" prior to German reunification.
- between what ultimately became the Template:Flagicon Republic of Ireland and the Template:Flagicon United Kingdom, between 1928 and 1979. The Irish Pound was held at exactly the same value as Sterling for this period, although it was not accepted for payments in the UK.
- Yen Bloc (between 1905 and 1945), between the Template:Flagicon Empire of Japan, the Template:Flagicon Korean Empire, Template:Flagicon Manchukuo, Template:Flagicon Mengjiang, the Template:Flagicon Wang Jingwei regime, and Japanese-occupied Southeast Asia prior to and during World War II.
Never materialized
- proposed Pan-American monetary union – abandoned in the form proposed by Argentina
- proposed monetary union between the Template:Flagicon United Kingdom and Template:Flagicon 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 also
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References
Further reading
- Acocella, N. and Di Bartolomeo, G. and Tirelli, P. [2007], ‘Monetary conservatism and fiscal coordination in a monetary union’, in: ‘Economics Letters’, 94(1): 56–63.
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External links
- West Africa opts for currency union
- Economist- Antipodean currencies (Australia and New Zealand)
- Reasons for the collapse of the Rouble Zone
- OECD Development Centre – the Rand Zone
Template:Economic integration Template:Authority control
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- ↑ Anguilla and Montserrat are members of OECS currency union, but not of the CSME.
- ↑ 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 Southeast Asia.
- ↑ alongside the ngultrum
- ↑ 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.
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- ↑ EU Overseas countries and some other territories participate partially in the EU single market per part four of the Treaty Establishing the European Community Template:Webarchive; 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. - ↑ Script error: No such module "citation/CS1".
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- ↑ Not currently on any political agenda, based mostly off conspiracy theories.