Monetary unions are becoming more common in the world today. They are being used to create open markets and strong economy blocks. According to (Paul Volcker, 2002), a monetary union is a group of countries sharing a common currency. More often than not, the countries share geographical boundaries and also have tight trade and financial relationships. The countries stop using their individual currencies and adopt a common currency for use. The most recent monetary union is the European Monetary Union (EMU). The following paper will give an overhaul on monetary unions and will centralize more on the EMU.
There are numerous advantages and disadvantages associated with a country maintaining its currency. According to (Oracle Education Foundation, 2002), the advantages are that a country is more able to maintain stability in the exchange rate as an individual as opposed to a union, a union has more rigid policies than an individual country which is unsought for by countries, there is also loss of sovereignty of a country once it joins a monetary union, a country is also more likely to suffer economic problems in instances when a member country of a union is suffering from inflation, hence a country’s economic and currency stability is affected by the stability of the economies of member countries.
The disadvantages of a country joining a monetary union are that ;a country incurs high transaction costs when doing business since it has to change its currency into the currency of the business partner, a country is not able to compare prices effectively with other countries since it does not share a common currency with them. In instances where there is a single market, the country suffers more since it trades with a different currency in a market where trade is being carried out in a common currency. The country also experiences uncertainties caused by exchange rate fluctuations. A country which uses its own currency stands to lose in the increased level of trade caused by a common currency, ( Oracle Education Foundation, 2002).
The European Monetary Union came to be in the year 1994 after the signing of the Maastricht treaty, but it was not until 2002 that the common currency, Euro went into circulation.(Geoff Riley, 2006). The treaty committed and bound the countries who were involved to a common currency. The EMU uses the Euro as the common currency. The currency has gained value over the years and it is now one of the top currencies of the world. At the launch of the Euro, it only covered 12 nations out of the 15 nations in the European Union.