A currency union is an intergovernmental agreement that involves two or more states sharing the same currency. These states may not necessarily have any further integration.
There are three types of currency unions:
- Informal – unilateral adoption of a foreign currency.
- 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.
Advantages and disadvantagesImplementing 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.
- 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 since fees to banks are lower.
- 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.
- The member states lose their sovereignty in monetary policy decisions. There is usually an institution that takes care of the monetary policy making 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.
Convergence and divergence
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 is a contemporary model for forming currency unions. Membership in the EMU requires that countries follow a strictly defined set of criteria. 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.
HistoryThe 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.
List of currency unions
|CFA franc||Issued by the Overseas Issuing Institute between 1945−1962 then by the Central Bank of West African States and the Bank of Central African States||'|
|1945||Formal, common policy||151,978,440|
|CFP franc||Issued by the Overseas Issuing Institute||'|
|1945||Formal, common policy||552,537|
|Eastern Caribbean dollar||Eastern Caribbean Currency Union of the OECS||'|
|1965||Formal, common policy|
de facto EMU for CSME members
|Euro||International status and usage of the euro|| Eurozone:|
and EU special territories:
|1999/2002||Formal, common policy and EMU for EU members|
Formal for Monaco and SBAs
Formal for Andorra since 2011
Informal for Kosovo, Montenegro
Formal for the rest
|Hong Kong dollar||1977||Informal; Decreto-Lei n.º 16/95/M prohibiting the refusal of the pataca by merchants and businesses.||7,775,200|
|Managed together by the Monetary Authority of Singapore||1967||Formal; currencies mutually exchangeable||5,137,000|
and external territories:
|Pound sterling||Sterling area|
and overseas territories:
and Crown dependencies:
|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|
Nepal minor usage
|New Zealand dollar|
|Israeli new sheqel||1927/1986||Informal||11,738,000|
|South African rand||Multilateral Monetary Area||1974||Formal|
de facto customs and monetary union for the SACU member countries
de facto economic and monetary union — 1924 creation of a customs union, then members of the European Free Trade Association, and now also part of the European Single Market.
|United States dollar|
and insular areas:
|1904||Formal for insular areas and sovereign status with Compact of Free Association, informal for other areas||339,300,000|
Note: Every customs and monetary union and economic and monetary union also has a currency union.
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.
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 with the mainland and in regards to third countries through the trade pacts signed by the mainland state.
Currency union in EuropeThe European currency union is a part of the Economic and Monetary Union of the European Union. EMU was formed during the second half of the 20th century after historic agreements, such as Treaty of Paris, Maastricht Treaty. 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, but there has not been a specific date set. The main independent institution responsible for stability of the Euro is the European Central Bank. Together with 15 national banks it forms the European System of Central Banks. 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.
|Bolivarian Alternative for the Americas||SUCRE||Latin America|
|?||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, 2015, 2024|
|West African Monetary Zone||Eco||Africa||2020||Inside Economic Community of West African States, planned to eventually merge with West African franc|
|ASEAN+3||Asian Monetary Unit||Asia||?||a free trade agreements matrix partially established|
|Cooperation Council for the Arab States of the Gulf||Khaleeji||Arabian Peninsula||c. 2013-2020||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||Planned for 2028 or later|
- between Bahrain and Abu Dhabi using the Bahraini dinar
- between Bahrain, Kuwait, Oman, Qatar and the Trucial States, using the Gulf rupee from 1959 until 1966
- between Aden,, Bahrain, Kenya, Kuwait, Oman, Qatar, British Somaliland, the Trucial States, Uganda, Zanzibar and British India using the Indian rupee
- between Belgium and the Grand-Duchy of Luxemburg using the Belgian/Luxembourgish franc from 1921 to the Euro
- between British India and the Straits Settlements using the Indian rupee
- between Czech Republic and Slovakia using the Czechoslovak koruna
- between Ethiopia and Eritrea using the Ethiopian birr
- between France, Monaco, and Andorra using the French franc
- between Austria-Hungary and Liechtenstein using the Austro-Hungarian krone
- between the Eastern Caribbean, Jamaica, Barbados, Trinidad and Tobago and British Guiana using the British West Indies dollar
- between the Eastern Caribbean, Barbados, Trinidad and Tobago and British Guiana using the Eastern Caribbean dollar
- between Italy, Vatican City, and San Marino using the Italian lira
- between Jamaica and the Cayman Islands using the Jamaican pound and later Jamaican dollar
- between Kenya, Uganda, and Zanzibar using the East African rupee
- between Kenya, Uganda, and Zanzibar using the East African florin
- between Kenya, Tanganyika and Zanzibar, Uganda, South Arabia, British Somaliland and Italian Somaliland using the East African shilling
- Latin Monetary Union, initially between France, Belgium, Italy and Switzerland, and later involving Greece, Romania, and other countries.
- between Liberia and the United States using the United States dollar
- between Mauritius and Seychelles using the Mauritian rupee
- between Nigeria, the Gambia, Sierra Leone, the Gold Coast and Liberia using the British West African pound
- between Prussia and the North German states using the North German thaler
- between Russia and the former Soviet republics using the Soviet ruble
- between Qatar and all the emirates of the United Arab Emirates, except Abu Dhabi using the Qatari and Dubai riyal
- between Saudi Arabia and Qatar using the Saudi riyal
- between Western Samoa and New Zealand using the New Zealand pound
- Scandinavian Monetary Union, between Denmark, Norway and Sweden
- between the Solomon Islands, Papua New Guinea and Australia using the Australian dollar
- between Australia, Papua, New Guinea, Nauru, the Solomon Islands, and the Gilbert and Ellice Islands using the Australian pound
- between Bavaria, Baden, Württemberg, Frankfurt, and Hohenzollern using the South German guilder
- between Spain and Andorra using the Spanish peseta
- between Trinidad and Tobago and Grenada using the Trinidad and Tobago dollar
- between Brunei, Malaysia, and Singapore using the Malaya and British Borneo dollar
- between Cambodia, Laos, Guangzhouwan, Annam, Tonkin, and Cochinchina between 1885 and 1952 using the French Indochinese piastre
- between, South West Africa, and Bechuanaland using the South African rand
- between Egypt, Anglo-Egyptian Sudan, and Mandatory Palestine using the Egyptian pound
- between West Germany and 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 Republic of Ireland and the 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.
- 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