Currency Unions

Currency unions have been a recurring phenomenon in monetary history. The most basic definition of a currency union is when two or more sovereign nations share a common currency. Even though a currency union shares many characteristics with international monetary regimes based on fixed exchange rates (such as the Bretton Wood system), it is the most extreme case of a fixed exchange rate as it also implies sharing a common unit of account between the participating countries. While the economic rationale for currency unions focuses on gains in monetary efficiency from decreasing transaction costs, history shows that political reasons also played a key role. In this chapter, I discuss the theoretical foundations of monetary unions (the so-called optimum currency area theory) and analyze the most important historical cases of currency unification, both domestic (the USA, Germany) and international. Finally I discuss the key lessons we can draw from the history of currency unions and their implications for the Economic and Monetary Union