Currency union
Agreement involving states sharing a single currency
From Wikipedia, the free encyclopedia
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]
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.[3]
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.[4]
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.[5][6]
List of currency unions
Existing
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.[14]
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.[15]
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 21 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.[16]
Planned
| Community | Currency | Region | Target date | Notes |
|---|---|---|---|---|
 East African Community |
East African shilling | Africa | 2012 (not met), 2015 (not met), 2024 (not met),[17] 2031[18] | |
| 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 [citation needed] | Asia | ? | a free trade agreements matrix partially established |
 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. |
 African Economic Community |
Afro or Afriq | Africa | 2028[19] | 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.[20] |
Disbanded
- 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, 
South Arabia, Bahrain, 
Kenya, Kuwait, Oman, Qatar, 
British Somaliland, the Trucial States, 
Uganda, 
Zanzibar and 
British India (later independent 
India) using the Indian rupee until 1974 - between
Belgium and the 
Grand-Duchy of Luxemburg (Belgium-Luxembourg Economic Union) using the Belgian/Luxembourgish franc from 1921 to the Euro - between British India and the
Straits Settlements (1837–1867) using the Indian rupee - between
Czech Republic and 
Slovakia (briefly from January 1, 1993 to February 8, 1993) 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 (and later
Tanganyika) using the East African florin - between
Kenya, Tanganyika and 
Zanzibar (later merged as 
Tanzania), 
Uganda, South Arabia, British Somaliland and 
Italian Somaliland using the East African shilling - Latin Monetary Union (1865–1927), initially between
France, Belgium, 
Italy and 
Switzerland, and later involving 
Greece,[21] 
Romania, 
Spain 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 (1838–1857) using the North German thaler - between
Russia and the 
former Soviet republics (1991–1993) using the Soviet ruble - between
Armenia and 
Artsakh using the Armenian dram - 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 (1870s until 1924), between
Denmark, 
Norway and 
Sweden[21] - 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 (1953–1967) using the Malaya and British Borneo dollar - between
Cambodia, 
Laos, Guangzhouwan, 
Annam, 
Tonkin, and 
Cochinchina (later 
Vietnam) between 1885 and 1952 using the French Indochinese piastre - between
South Africa, South West Africa, and 
Bechuanaland (later independent 
Botswana) using the South African rand - between
Egypt, 
Anglo-Egyptian Sudan, and 
Mandatory Palestine (until 1926) 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. - Yen Bloc (between 1905 and 1945), between the
Empire of Japan, the 
Korean Empire, 
Manchukuo, 
Mengjiang, the 
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 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
