A currency union occurs when the economies of two countries (usually sovereign states) have an identical currency or decide to fix the prices of their currencies to the common reference currency to keep their currencies identical. The primary goal of creating the Currency union would be to bring together members' financial policy and economic activity. The currency union is commonly called a monetary union.
Understanding Currency Unions
A currency union occurs when the states (or regions) utilize the same currency. For instance, eight European nations formed the European Monetary System in 1979. The system was based on swap rates fixed by mutual agreement between the member countries. In 2002 twelve European nations agreed to a common monetary policy and created the European Economic and Monetary Union. One reason countries join these kinds of systems is to cut down on the costs of trans-border transactions.
A currency union or monetary unit is distinct from an economy and monetary union using a single currency, but not any further integration between countries. Integration could also include the creation of one market to ease cross-border trade, which means the removal of fiscal and physical barriers between countries, allowing the flow of labor, capital products, services, and goods to boost the overall economy. The most recent examples of currency unions comprise those of the Euro along with the CFA Franc, among others.
Another method by which countries join their currencies is with the help of pegs. Most countries peg their currency to the currencies of other countries, typically with respect to the U.S. dollar, the Euro, or even the value of gold. Pegs in currencies create stability among trading partners, and they can stay for a long time. For example, the Hong Kong dollar has been fixed at HK$7.8 against the U.S. dollar since 1983. The Bahamian dollar has been tied at parity with the greenback since 1973.
Apart from the peg, some countries have adopted an international currency. For instance, the U.S. dollar is the official currency of El Salvador and Ecuador, as well as the Caribbean islands comprising Bonaire, Sint Eustatius, and Saba. The Swiss Franc is the main currency of both Switzerland and Lichtenstein.
Over 20 currencies are officially recognized, among them the most important of which is the Euro. It is utilized in 19 out of 28 countries of the European Union. Another is the CFA Franc, supported by the French Treasury and tied to the Euro. It is accepted in 14 countries of Central as well as West Africa, in addition to Comoros. It is also used in Comoros.
Currency Unions History
Over the years, nations have joined currency unions to facilitate trade and boost their economies. It is also a way to bring together previously disjointed states. The 19th century saw Germany's old customs union help unify the states that were divided in the German Confederation to boost trade. A number of states joined the union in 1818, which triggered several acts to uniformize the worth of the coins used throughout the region. The system worked and resulted in the political union of Germany in 1871. This was and then the establishment of the Reichsbank in 1876. It was also established in 1876, with the Reichsmark as the official currency.
In 1865, France was the leader in forming the Latin Monetary Union, which included France, Belgium, Italy, Greece, and Switzerland. Silver and gold coins were standardized and were made legal tender. They could also be traded across borders to boost trade. The currency union proved successful and other countries also joined. But, it was officially shut down in 1927, amid the economic and political turmoil of the first half of the century. Other historic currency unions comprise the Scandinavian Monetary Union of the 1870s, founded on a gold-based currency common to all nations.
European Currency Union Evolution
The development of the European currency union in its current form starts with the economic unification strategies implemented throughout the second portion of the second half of the 20th century. The Agreement, adopted by Europe in 1944, centered on an exchange rate fixed to stop the market speculations that led to the Great Depression. Other agreements strengthened European economic integration and unified Europe. But the global economic difficulties of the 1970s hindered the further European integration of the economy until it was revived in the latter part of the 1980s.
The signing of the Maastricht Treaty paved the way for the ultimate formation of the European Economic and Monetary Union. Therefore, in 1998, the European Central Bank was established, and a fixed currency and conversion rate was established among governments that are members of the monetary union. The Euro was officially adopted as the single currency of Europe by 12 members of the European Union in the year 2002. In the year 2020, nineteen nations made the switch from their previous currency to the euro.
