Monetary Union Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

A monetary union is an economic arrangement among states in which a single currency is adopted to replace various national currencies, and there is widespread cooperation on monetary policy. Monetary unions seek to stabilize fluctuations in the value of money in order to facilitate trade and economic cooperation. Through history, such unions have existed; however, in the more successful, monetary union has proceeded with political union. The contemporary European Monetary Union (EMU) of the European Union (EU) member states has significantly affected regional and global politics by redefining norms of national sovereignty and creating a currency capable of challenging the economic hegemony of the U.S. dollar.

The Foundations And History Of Monetary Unions

Throughout history, merchants and the commercial classes have sought means to ease trade with neighboring states. Even among the ancient Greeks and Romans, there were nascent efforts to create a single denomination of exchange for universal use. For instance, in 269 BCE, the didrachm, a Roman silver coin, was introduced to facilitate trade between Rome and the Greeks. It was later superseded by the denarius, which was widely used throughout the region. During the Middle Ages, there were more formal attempts to develop formalized monetary cooperation, including common currencies and reciprocal trade arrangements. These efforts were especially significant among the commercial cities and trade leagues of northern Europe and the Mediterranean, but these initiatives typically lacked the main features of modern monetary unions. In addition to a joint currency, a true union includes a central, supranational monetary authority such as a central bank. Consequently, there is a high degree of coordination in monetary policy and usually standard principles in fiscal policy, especially in regard to taxation, tariffs, and trade practices.

The first major initiative to create a modern monetary union occurred in the New England colonies beginning in the mid-1600s. Each of the four colonies—Connecticut, Massachusetts, New Hampshire, and Rhode Island—accepted the printed currencies of the other colonies as legal tender for economic purposes, including tax payments. The colonies also coordinated efforts to maintain the value of their respective currencies. However, by 1750, Massachusetts, the largest of the economies, found its currency devalued as its neighbors began to print large quantities of their notes to fund a variety of projects. Massachusetts withdrew from the arrangement, and the union collapsed. In the 1830s, France endeavored to promote a monetary union among the states of Europe. Successive French governments encouraged the adoption of the franc as a common currency. In 1865, Belgium, France, Italy, and Switzerland created a franc zone that included a common currency and fixed gold-to-silver conversion rates, as well as limitations on the printing and coinage of currency to control inflation. Eighteen countries eventually adopted the franc and some aspects of the monetary union. World War I (1914–1918) led to the demise of the union, which was disbanded in 1926, although many member states had previously reinstituted national currencies at fixed exchange rates. One continuing manifestation of the union is the French Central African (CFA) Franc Zone among the former African colonies of France. Their franc is pegged to the French franc (now euro), and member states must abide by a series of common monetary principles. Notable failed efforts at monetary unions include the Scandinavian Monetary Union (1873–1924) of Denmark, Norway and Sweden, and the East African Currency Area in the British region of Africa (1922–1972). In addition, efforts by Egypt to create a monetary union among Gulf states in the early 1990s failed, although Bahrain, Kuwait, Qatar, and Saudi Arabia revived the project and sought to create a union by 2010.

The most successful monetary unions were those that accompanied political union. For instance, the consolidation of the thirteen semi-independent U.S. states from the Articles of Confederation to the 1787 Constitution paved the way for the adoption of a single currency and a central source for national monetary and fiscal policy (and a central bank). A similar development occurred among the German states and principalities beginning with the 1818 customs union, followed by the more formal Zollverein in 1834 and culminating in German unification in 1871 with the creation of a central bank (the Reichsbank) and a national currency (the Reichsmark).

European Monetary Union

The trade and tariff disputes of the post–World War I era marked the end for most supranational monetary unions, but the idea gained new support in the aftermath of World War II (1939–1945). After repeated efforts, EMU was accepted within the EU through the 1992 Maastricht Treaty. The effort marked the largest and most ambitious supranational monetary union in world history. EMU was achieved in three stages. First, states increased cooperation between central banks but continued autonomous monetary policy and financial transactions. However, the European Currency Unit introduced a means to undertake financial transactions between banks in different nations. Second, in 1994, the European Monetary Institute (EMI) was created. The EMI served as forerunner to the European Central Bank (ECB) and was given the task of coordinating policy among the respective national central banks. The second stage involved a moratorium on the extension of credit by central banks. (That role was undertaken by the EMI and later the ECB.) Third, the currencies became fixed to specific rates of exchange, and the euro, the EU’s common currency, was introduced in 1999. In addition, the ECB became operational through the 1999 Growth and Stability Pact, which required member states to keep deficits at 3 percent or less of Gross Domestic Product (GDP) and national debts at less than 60 percent of annual GDP. Although many aspects of EMU have worked very well, in 2005, the Growth and Stability Pact had to be revised following the inability of major members France and Germany to meet the strict fiscal requirements.

The euro is the currency of EU members Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. Denmark, Great Britain, and Sweden retained their national currencies. The ten countries that joined the EU in 2004 were required to adopt the currency when they met its economic criteria. The euro has been very successful at achieving its main goal—easing financial transactions between EU members. It has also redefined norms of national sovereignty, as the nation-states of the EU have surrendered a high degree of economic control to the supranational ECB. A secondary purpose was to challenge the global hegemony of the dollar in international monetary transactions. Successive U.S. administrations adopted a weak dollar policy in order to promote exports. As a result, the high euro-to-dollar value constrained European exports to the United States and hurt tourism markets in Europe but made the currency more attractive to financial traders.

Bibliography:

Capie, Forrest H., and Geoffrey E.Wood, eds. Monetary Unions:Theory, History, Public Choice. New York: Routledge, 2003.
Fishman, Robert M., and Anthony M. Messina, eds. The Year of the Euro: The Cultural, Social and Political Import of Europe’s Common Currency. South Bend, Ind.: University of Notre Dame Press, 2006.
Grahl, John. After Maastricht: A Guide to European Monetary Union. London: Lawrence and Wishart, 1997.
Grauwe, Paul De, and Jacques Melitz, eds. Prospects of Monetary Unions after the Euro. Cambridge: Massachusetts Institute of Technology Press, 2005.
Hosli, Madeleine O. The Euro: A Concise Introduction to European Monetary Integration. Boulder, Colo.: Lynne Rienner, 2005.
Jones, Eric. The Politics of Economic and Monetary Union: Integration and Idiosyncrasy. Lanham, Md.: Rowman and Littlefield, 2002.

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