currency-unions

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The Implications of Joining a Currency Union

A currency union, also known as a monetary union, is established when the members of a customs union and common market establish a common central bank which issues a common currency and controls the monetary policy of member countries
- Prior to Brexit, the UK was a member of the European Customs Union and common market but never joined the Eurozone
- At the start of 2023, 20 of the 27 countries in the EU were members of the Eurozone

Evaluating Currency Unions

Advantages	Disadvantages
Price stability The common currency eliminates exchange rate fluctuations, reducing transaction costs and increasing price stability within the union	Limited monetary policy flexibility Member countries relinquish control over their monetary policy decisions to a regional authority, such as the European Central Bank in the case of the Eurozone This restricts a country’s ability to independently adjust interest rates or implement policies tailored to its specific economic conditions, potentially hindering its ability to address domestic economic challenges
Increased trade and market access A single currency makes it easier for businesses to engage in cross-border trade within the union, leading to increased trade and economic growth	Loss of exchange rate control Countries in a monetary union lose the ability to adjust their exchange rates to maintain competitiveness They cannot rely on currency devaluation or revaluation to restore competitiveness or rebalance their economies
Enhanced monetary policy credibility Having a credible and independent central bank that follows a transparent monetary policy promotes investor confidence in all countries within the union (even weaker ones)	Fiscal constraints and policy coordination Countries must adhere to strict budgetary rules, deficit and debt limits, and coordinated fiscal policies This constraint limits a country’s fiscal policy autonomy and can create challenges during economic downturns (recession)

Advantages

Disadvantages

Price stability
- The common currency eliminates exchange rate fluctuations, reducing transaction costs and increasing price stability within the union

Limited monetary policy flexibility
- Member countries relinquish control over their monetary policy decisions to a regional authority, such as the European Central Bank in the case of the Eurozone
- This restricts a country’s ability to independently adjust interest rates or implement policies tailored to its specific economic conditions, potentially hindering its ability to address domestic economic challenges

Increased trade and market access
- A single currency makes it easier for businesses to engage in cross-border trade within the union, leading to increased trade and economic growth

Loss of exchange rate control
- Countries in a monetary union lose the ability to adjust their exchange rates to maintain competitiveness
- They cannot rely on currency devaluation or revaluation to restore competitiveness or rebalance their economies

Enhanced monetary policy credibility
- Having a credible and independent central bank that follows a transparent monetary policy promotes investor confidence in all countries within the union (even weaker ones)

Fiscal constraints and policy coordination
- Countries must adhere to strict budgetary rules, deficit and debt limits, and coordinated fiscal policies
- This constraint limits a country’s fiscal policy autonomy and can create challenges during economic downturns (recession)

Economics-A-level-Aqa

currency-unions

The Implications of Joining a Currency Union

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