- 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
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Disadvantages
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- Limited monetary policy flexibility
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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
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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
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- Increased trade and market access
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- Loss of exchange rate control
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Countries in a monetary union lose the ability to adjust their exchange rates to maintain competitiveness
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They cannot rely on currency devaluation or revaluation to restore competitiveness or rebalance their economies
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- Enhanced monetary policy credibility
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- Fiscal constraints and policy coordination
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Countries must adhere to strict budgetary rules, deficit and debt limits, and coordinated fiscal policies
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This constraint limits a country's fiscal policy autonomy and can create challenges during economic downturns (recession)
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