Advertisement

Currency Unions

  • Anders ÖgrenEmail author
Reference work entry
  • 39 Downloads

Abstract

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. This chapter discusses the theoretical foundations of monetary unions (the so-called optimum currency area theory) and analyzes the most important historical cases of currency unification, both domestic (the USA, Germany) and international. Finally this chapters discusses the key lessons that can be drawn from the history of currency unions and their implications for the Economic and Monetary Union.

Keywords

Central banks Fiscal systems Monetary theory Monetary policy Optimum currency areas 

References

  1. Alesina A, Barro RJ (2000) Currency unions. NBER working paper no 7927. https://www.nber.org/papers/w7927
  2. Bae K-H, Bailey W (2011) The Latin monetary union: some evidence on Europe’s failed common currency. Rev Dev Finance 1:131–149CrossRefGoogle Scholar
  3. Basevi G. et al (1976) The Optica Report 1975. Doc. II/909/75 final. Directorate General for Economic and Financial Affairs [online]. Brussels: European Commission, 16.01.1976 [accessed 29 May 2012]. Available on: http://ec.europa.eu/economy_finance/emu_history/documentation/chapter8/19760116en61opticareport1975.pdf
  4. Basevi G. et al (1977) Inflation and Exchange Rates: Evidence and Policy Guidelines for the European Community. Optica Report 1976. II/855/76, 10 February 1977. [EU Commission – Working Document]Google Scholar
  5. Bordo MD, Jonung L (1999) The future of the EMU: what does the history of monetary unions tell us. NBER working paper no 7365. https://www.nber.org/papers/w7365
  6. Broz T (2005) The theory of optimum currency areas: a literature review. Privredna kretanja i ekonomska politika 104:53–78Google Scholar
  7. Calvo G (1998) Capital flows and capital market crises: the simple economics of sudden stops. J Appl Econ 1(1):35–54CrossRefGoogle Scholar
  8. Capie F (1998) Monetary unions in historical perspective: what future for the euro in the international financial system. Open Econ Rev 9:447–465CrossRefGoogle Scholar
  9. De Grauwe P (2012) The governance of a fragile Eurozone. Aust Econ Rev 45:255–268CrossRefGoogle Scholar
  10. De Grauwe P (2013) Design failures in the eurozone. Can they be fixed? European Commission Economic papers 491. http://ec.europa.eu/economy_finance/publications/economic_paper/2013/ecp491_en.htm
  11. De Grauwe P, Ji Y (2015) Correcting for the Eurozone design failures: the role of the ECB. J Eur Integr 37:739–754CrossRefGoogle Scholar
  12. Dellas H, Tavlas GS (2009) An optimum-currency-area odyssey. J Int Money Financ 28:1117–1137CrossRefGoogle Scholar
  13. Edwards S (2004) Thirty years of current account imbalances, current account reversals, and sudden stops. IMF Staff Pap 51(suppl. 1):1–49Google Scholar
  14. Eichengreen B (1992) One Money for Europe? Lessons from the US Currency Union Economic Policy, Europe 1992, 5(10):117–187Google Scholar
  15. Eichengreen B (1993) European monetary unification. J Econ Lit 31:1321–1357Google Scholar
  16. Eichengreen B (2007) The breakup of the euro area. NBER working paper no 13393. https://www.nber.org/papers/w13393
  17. Eichengreen B (2008) Globalizing capital. A history of the international monetary system. Princeton University Press, PrincetonCrossRefGoogle Scholar
  18. Einaudi LL (2000) From the franc to the ‘Europe’: the attempted transformation of the Latin monetary union into a European monetary union, 1865–1873. Econ Hist Rev 53:284–308CrossRefGoogle Scholar
  19. Einaudi L (2001) Money and politics: European monetary unification and the international gold standard (1865–1873). Oxford University Press, New YorkGoogle Scholar
  20. European Commission (1962) Mémorandum de la Commission sur le programme d’action de la Communauté pendant la deuxième étape. Bruxelles: Service des publications des Communautés européennes, p 107. http://www.cvce.eu/obj/memorandum_de_la_commission_24_octobre_1962-fr-4bf24e3a-80ca-4886-b8dd-1a4d0a92d411.html
  21. European Commission (1966) The development of a European capital market. Report of a group of experts appointed by the EEC Commission, BrusselsGoogle Scholar
  22. European Commission (1975) Report of the study group, “Economic and monetary union 1980” 8 March 1975 European Commission, Brussels http://www.cvce.eu/obj/the_marjolin_report_brussels_march_1975-en-93d25b61-6148-453d-9fa7-9e220e874dc5.html
  23. European Commission (1989) Report on economic and monetary union in the European Community. Presented April 17, 1989 (commonly called the Delors Plan or Report) By Committee for the Study of Economic and Monetary Union, BrusselsGoogle Scholar
  24. European Commission (1990) One market, one money. An evaluation of the potential benefits and costs of forming an economic and monetary union. Eur Econ 44, Oct 1999, BrusselsGoogle Scholar
  25. Flandreau M (1996) The French crime of 1873: an essay on the emergence of the international gold standard, 1870–1880. J Econ Hist 56:862–897CrossRefGoogle Scholar
  26. Flandreau M (2000) The economics and politics of monetary unions: a reassessment of the Latin monetary union, 1865–71. Financ Hist Rev 7:25–43CrossRefGoogle Scholar
  27. Frankel JA, Rose AK (1998) The endogeneity of the optimum currency area. Econ J 108:1009–1025Google Scholar
  28. Giavazzi F, Pagano M (1988) The advantage of tying one’s hands: EMS discipline and central bank credibility. Eur Econ Rev 32(5):1055–1075Google Scholar
  29. Giavazzi F, Pagano M (1988) The advantage of tying one’s hands: EMS discipline and Central Bank credibility. European Economic Review 32(5)1055–1075Google Scholar
  30. Glick R Rose AK (2001) Does a currency union affect trade? The time-series evidence. CEPR discussion paper no 2891Google Scholar
  31. Glick R, Rose AK (2002) Does a currency union affect trade? The time-series evidence. Eur Econ Rev 46:1125–1151CrossRefGoogle Scholar
  32. Glick R, Rose AK (2015a) Currency unions and trade: a post-EMU Mea Culpa. CEPR discussion paper no 10615. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10615
  33. Glick R, Rose AK (2015b) Currency unions and trade: a post-EMU Mea Culpa. NBER working paper no 21535. https://www.nber.org/papers/w21535
  34. Glick R, Rose AK (2016) Currency unions and trade: a post-EMU reassessment. Eur Econ Rev 87:78–91CrossRefGoogle Scholar
  35. Goodhart CAE (1998) The two concepts of money: implications for the analysis of optimal currency areas. Eur J Polit Econ 14:407–432CrossRefGoogle Scholar
  36. Grubb F (2006) The US constitution and monetary powers: an analysis of the 1787 constitutional convention and the constitutional transformation of the US monetary system. Financ Hist Rev 13:43–71CrossRefGoogle Scholar
  37. Holtfrerich C-L (1993) Did monetary unification precede or follow political unification of Germany in the 19th century? Eur Econ Rev 37:518–524CrossRefGoogle Scholar
  38. James H (2012) Making the European monetary union. Harvard University Press, CambridgeCrossRefGoogle Scholar
  39. Kenen P (1969) The theory of optimum currency areas: an eclectic view. In: Mundell R, Swoboda A (eds) Monetary Problems of the International Economy, pp 41–60. The University of Chicago Press, ChicagoGoogle Scholar
  40. Kouparitsas MA (2001) Is the United States an optimum currency area? An empirical analysis of regional business cycles. Federal Reserve Bank of Chicago WP No 2001-22. https://fraser.stlouisfed.org/title/5285/item/533613
  41. Krugman P (2013) Revenge of the optimum currency area. NBER Macroecon Annu 27(1):439–448CrossRefGoogle Scholar
  42. McKinnon RI (1963) Optimum currency areas. Am Econ Rev 53(4):717–725Google Scholar
  43. Merler S, Pisani-Ferry J (2012) Sudden stops in the euro area. Rev Econ Inst 3(3):1–23Google Scholar
  44. Michener R, Wright RE (2006) Development of the US monetary union. Financ Hist Rev 13(1):19–41CrossRefGoogle Scholar
  45. Mongelli FP (2002) ‘New’ views on the optimum currency area theory: what is EMU telling us? ECB working paper no 138. https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp138.pdf
  46. Mongelli FP (2008) European economic and monetary integration, and the optimum currency area theory. European Commission Economic papers 302. http://ec.europa.eu/economy_finance/publications/pages/publication_summary12083_en.htm
  47. Mundell RA (1961) A theory of optimum currency areas. Am Econ Rev 51:657–665Google Scholar
  48. Nitsch V (2002) Honey, I shrunk the currency union effect on trade. World Econ 25:457–474CrossRefGoogle Scholar
  49. Ögren A (2009) Financial revolution and economic modernisation in Sweden. Financ Hist Rev 16(1):47–71Google Scholar
  50. Ögren A, Øksendal LF (2012) The euro and the gold: what are the lessons? In: Ögren A, Øksendal L-F (eds) The gold standard peripheries – monetary policy, adjustment and flexibility in a global setting. Palgrave Macmillan, LondonGoogle Scholar
  51. Øksendal LF (2007) The impact of the Scandinavian monetary union on financial market integration. Financ Hist Rev 14:125–148CrossRefGoogle Scholar
  52. Pakko MR, Wall HJ (2001) Reconsidering the Trade-Creating Effects of a Currency Union. Federal Reserve bank of St. Louis Review, Sep.-Oct., pp 37–45Google Scholar
  53. Persson T (2001) Currency unions and trade: how large is the treatment effect? Econ Policy 16(33):433–448CrossRefGoogle Scholar
  54. Reinhardt C, Rogoff K (2009) This time is different: eight centuries of financial folly. Princeton University Press, PrincetonCrossRefGoogle Scholar
  55. Rockoff H (2000) How long did it take the United States to become and optimal currency area? NBER historical paper no 124. https://www.nber.org/papers/h0124
  56. Rose AK (2000a) One money, one market: estimating the effect of common currencies on trade. Econ Policy 15:7–33CrossRefGoogle Scholar
  57. Rose AK (2000b) Does a currency union boost international trade? Calif Manag Rev 42:52–62Google Scholar
  58. Rose AK (2001a) Honey, the currency union effect on trade hasn’t blown up. World Econ 25:475–479CrossRefGoogle Scholar
  59. Rose AK (2001b) Currency unions and trade: the effect is large. Econ Policy 16:449–461CrossRefGoogle Scholar
  60. Rose A, Engel C (2002) Currency unions and international integration. J Money Credit Bank 34(4):1067–1089CrossRefGoogle Scholar
  61. Rose AK, van Wincoop E (2001) National money as a barrier to international trade: the real case for currency union. Am Econ Rev 91:386–395CrossRefGoogle Scholar
  62. Rousseau PL (2006) A common currency: early US monetary policy and the transition to the dollar. Financ Hist Rev 13(1):97–122CrossRefGoogle Scholar
  63. Russell HB (1898) International monetary conferences. Their purposes, character and results with a study of the conditions of currency and finance in Europe and America during intervening periods, and in their relations to international action. Harper & Brothers Publishers, New York/LondonGoogle Scholar
  64. Saint-Paul G (2010) Is the euro a failure? http://www.voxeu.org/index.php?q=node/4999
  65. Sala-i-Martin X, Sachs J (1991) Fiscal federalism and optimum currency areas: evidence for Europe from the United States. NBER working paper no 3855. https://www.nber.org/papers/w3855
  66. Smith C (2002) Currency unions and gravity models revisited. Reserve Bank of New Zealand discussion paper no 2002/07. https://www.rbnz.govt.nz/research-and-publications/discussion-papers/2002/dp2002-07
  67. Sylla R (2006) The transition to a monetary union in the United States, 1787–1795. Financ Hist Rev 13(1):73–95CrossRefGoogle Scholar
  68. Talia K (2004) The Scandinavian currency union 1873–1924: studies in monetary integration and disintegration, Dissertation, Stockholm School of EconomicsGoogle Scholar
  69. Thygesen N (1978) Inflation and exchange rates: Evidence and policy guidelines for the European community. J Int Econ Rev 8(2):301–317Google Scholar
  70. Timini J (2018) Currency unions and heterogeneous trade effects: the case of the Latin Monetary Union. Eur Rev Econ Hist 22:322–348CrossRefGoogle Scholar
  71. Weiman D (2006) Introduction to the special issue on the formation of an American monetary union. Financ Hist Rev 13(1):11–17CrossRefGoogle Scholar
  72. Willis H (1901) History of the Latin monetary union. Economic Studies of the University of Chicago, ChicagoGoogle Scholar

Copyright information

© Springer Nature Singapore Pte Ltd. 2020

Authors and Affiliations

  1. 1.Department of Economic HistoryLund University School of Economics and ManagementLundSweden

Personalised recommendations