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Concept
Currency union
Summary
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.
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.
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.
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.
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 (such as a central bank) that takes care of the monetary policymaking in the whole currency union.
The risk of asymmetric "shocks" may occur.
Official source
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