Currency Consolidation and Currency Unions

In outlining the ‘tripolar’ options for exchange rate regimes in Chapter 3 we foreshadowed that we would consider controversies over the third polar option — the currency union, including full monetary union — in this chapter. Arguments for the widespread adoption of a common currency, or even a universal global currency, all turn on the idea of monetary internationalization, or international monetary integration. In short, they are arguments for increasing the extent of financial integration between nations and for finding optimal monetary standards. Single national currencies are a reflection of monetary independence, and while being advantageous as national symbols, they are an obstacle, in principle, to full international monetary integration. In this chapter we shall consider ideas and policies on system-wide issues — ideas and policies that feature multilateral approaches allowing countries actively to participate in the process of financial and economic integration by way of achieving some form of common money. The debates during the post-BW era over the process of transition to a common currency (such as the euro) will largely be avoided. The longer-term principles and associated policies required to create a common currency or choose to consolidate currencies in the first place, will be the focus of this chapter. Similarly, the comparatively short-term issue of the rise to dominance of one or other national currency in the international realm (e.g. dollar supremacy vs. yen vs. euro) will be set aside. Our attention will be accorded to broader issues of the international financial architecture: the purpose, rationale and place of common currencies, currency consolidation (e.g. dollarization), deliberate design of a universal global currency, and the potential for the spontaneous emergence of new currency arrangements, in that overall architecture.