Monetary Union

Monetary Union (AO2)

• A monetary union is a common market, but with an added collective monetary policy.

• In other words, "An integrated trading bloc with free trade, common trade restrictions, free flow of factors of production, and a common monetary policy (currency)"

• An example is the Eurozone, the countries the EU that uses the Euro as a currency

• See the following handy diagram to see the differences between all of these trading blocs and unions:

The following content is for the HL syllabus only.

Advantages and Disadvantages of Monetary Unions (AO3) (HL)

Advantages:

• With a common monetary policy and hence currency, there is certainty in the exchange rate, increasing stability and confidence in trading.

• Because of the convenience of avoiding exchanging currencies, transaction costs are lowered.

• This convenience also incentivizes more investment and more trade.

Disadvantages:

• With a common currency and policies, countries lose sovereignty, even more than in regular trading blocs, as they can no longer control their own monetary policy.

• Because every country is different, a monetary policy will affect member states differently. 

• Setting up a common currency will require high costs for converting old currencies into the new common one, as countries have to replace their banknotes and update the details of every economic transaction.