What Is a Currency Union?

Currency Union (Monetary Unions) refers to a country using the same currency as its neighbors, including two forms of unified currency (such as the euro) and dollarization. Dollarization has caused a country to abandon the revenue from coinage tax and lose the sovereignty of monetary policy, which is an extreme form of the fixed exchange rate system.

Currency union

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Currency Union / Monetary Unions refers to a country using the same currency as its neighbors, including the unified currency (such as

A currency union is the use of a

(1) Marx's argument about the process of money generation and the nature of money in his currency theory

Marx's theory of money was developed from the theory of commodity value. Money spontaneously arises from the internal contradiction of commodities to the transformation of contradictions. With the development of inherent contradictions in commodity relations,

Monetary Union is guarding

1. Political unification and currency union

In the past 200 years, there have been many currency unions in the world. From a political point of view, it can be divided into monetary unions under political unification and monetary unions between sovereign states. From the point of view of the monetary management system, it can be divided into a centralized currency union and a decentralized currency union. The former refers to the formation of a unified monetary authority by the monetary union, that is, the central bank; the latter refers to the coexistence of several monetary authorities, but coordination. Combining the nature of politics with the nature of money management, monetary unions can be divided into three main categories:

(1) Politically independent centralized currency union. Politically independent countries are usually centralized currency unions, such as Germany, Italy, and Switzerland in history. First, complete political unification, then realize currency unions, and then implement unified currencies. In the United States, for example, the country is divided into 12 Federal Reserve regions, each of which can issue US dollar banknotes, but these banknotes can always be exchanged 1: 1. Historically, monetary unions have often been the result of political integration. Once political union is achieved and an independent country is created, a currency union will follow. The disintegration of political integration led to the disintegration of the monetary union, as did the former Soviet Union, Czech Slovakia, and Yugoslavia.

(2) Decentralized currency union of sovereign states. From 1865-1926, the Latin Monetary Union formed by France, Italy, Belgium, and Switzerland, and from 1872-1931 by Denmark, Sweden, and Norway

European Economic and Monetary Union

The European Economic and Monetary Union will bring profound changes to all aspects of the EU and the world economy. It not only affects the allocation of resources, income distribution, economic stability and economic growth, but also directly or indirectly affects the market system of goods, capital and labor, and changes the economic and political structure of the EU. At the same time, the launch of the euro is also the most important historical event in the international financial field since the Bretton Woods monetary system.

EU and Euro challenges

Since the birth of the European Economic and Monetary Union and the Euro, fierce debates have taken place on its future, and it has been found that the European Economic and Monetary Union has a series of weaknesses and defects.

1. Challenges of fiscal policy

The "Mayo" sets strict standards for the amount of debt and fiscal deficits of each country, but because fiscal policies are under the control of member countries, coordination is difficult, which will cause two major problems. First, it is difficult for member states to deal with the impact of asymmetry. The so-called asymmetric shock refers to the economic impact of a particular country or sector (such as war, natural disasters, deterioration in terms of trade, financial crisis, oil crisis, etc.), due to the adverse economic impact of such shocks with other countries or The sectors are not synchronized, that is, asymmetric, and require special economic policies to adjust. If the countries affected by the asymmetric shock do not form a monetary union with other countries, they can use monetary policies such as exchange rate and interest rate policies, and fiscal policies to adjust. In the case of forming a monetary union, due to the loss of monetary policy means and fiscal policy measures are restricted, this particular country or sector will have serious economic problems. The second is procyclical fiscal policy behaviors and tendencies of member governments. According to Keynes's economic theory, fiscal policy should be counter-cyclical. When the economy is booming, implement austerity fiscal policy to prevent the economy from overheating; when the economy is depressed, implement an expansionary fiscal policy to stimulate economic growth and maintain stable economic development. However, within the European Economic and Monetary Union, when the economy is booming, there are no restrictions on public spending and tax cuts, and during the economic downturn, the Mayo forced governments to reduce fiscal expenditures and increase taxes to meet fiscal deficits not exceeding 3% GDP requirement. This runs counter to Keynes's countercyclical fiscal policy.

Challenges of monetary policy

In terms of monetary policy, there are four major problems. The first is the issue of the lender of last resort. In a sovereign country, the central bank assumes the role of lender of last resort and has the responsibility to ensure the liquidity of the state's payment system. The country's total stock of resources is the physical basis and final guarantee of currency. Nominally, the last lender in the Eurozone is the European Central Bank, but the Mayo does not give the European Central Bank the right to exercise the lender of last resort. Even if the European Central Bank is authorized by the Eurozone countries to assume this responsibility, The capital (50 billion euros paid by each member in proportion) and its reserves are too small to assume this responsibility. In fact, there is no real lender of last resort in the euro area, and the absence of a lender of credit will weaken the euro once a liquidity crisis occurs. The second is the issue of financial supervision. The euro area lacks a unified central authority to supervise the financial system. The Mayo stipulates that the European Central Bank has certain supervisory functions, but the main supervisory powers are borne by the central banks of various countries. This means that once a financial crisis occurs within the euro area, it will be very difficult to solve the problem, and the stability of the financial system in the euro area cannot be guaranteed at all. The third is the division of monetary policy power. According to the Mayo Rules, the European Central Bank implements its monetary policy independently, but the exchange rate mechanism is determined by the Council of the EU Finance Ministers. Fourth, the monetary policy decisions of the European Central Bank and the Eurozone lack transparency.

3. Challenges of Optimal Currency Area Theory

The theory of the optimal currency area was proposed by Robert Mundell in 1961. He won the Nobel Prize for Economics in 1999 for his contribution to this theory. According to the theory of the optimal currency area, the optimal currency area should have the following criteria: (1) the mobility of labor and capital: the high mobility of transnational labor and capital will reduce the use of exchange rates to restore competitiveness and eliminate international revenue Supports unbalanced adjustment tools. If labor can move from areas with high unemployment to areas with low unemployment, wages and other costs will converge, and the free flow of capital will reduce the need to adjust relative costs and prices through exchange rates. If labor and capital are not flowing, changes in relative prices will be the only means of adjusting the balance of payments, so floating exchange rates are more effective than fixed exchange rates and monetary unions. (2) Economic openness and economic scale: The higher the economic openness and the smaller the scale of a country, the more effective the fixed exchange rate is, and the more the country is inclined to join the currency union. (3) Flexibility of prices and wages: If prices and wages are flexible, the adjustment of relative prices can be smoothly implemented through the market, reducing the need for exchange rate adjustments. (4) Similar industrial structures: Countries with the same production structure and a high degree of diversity, external shocks will have symmetrical effects. (5) If member states have achieved fiscal integration, fiscal transfer payments can replace monetary policies such as interest rates and exchange rates to offset the impact of asymmetric shocks.

Europe's labor market is rigid, and labor mobility is limited by many factors such as differences in language, culture, and social security systems. The fiscal revenue of the European Union accounts for only about 1.3% of the EU's GDP. In 2001, the revenue was only 90 billion Euros, and 40 billion Euros were used for common agricultural policies, and more than 36 billion Euros were used for structural funds. limited. Obviously, the euro area does not meet the requirements for an optimal currency area. A lot of empirical analysis also shows that the euro area is not an optimal currency area, at least compared with the United States. The low cost brought by the single currency and the benefits created by trade are largely offset by the economic adjustment costs caused by abandoning the sovereignty of the national currency.

4.Political challenges

Traditionally, Europeans regard their own country as the most basic political entity, identifying with their country and national symbols such as the national flag, national anthem, and currency representing their respective countries. In the course of historical development, countries have formed their own historical, linguistic, cultural, and political traditions. The boundaries of a country are often linguistic boundaries. Contradictions in different language areas of the same country are very acute. Belgium is a typical representative. The supranational and pan-European nature of a single currency has always been a source of doubt among Europeans. In fact, the Economic and Monetary Union and the various systems set up around its implementation, such as the European Central Bank, the Euro, the Stability and Growth Pact, have never been included in a widely accepted political framework for European integration.