Currency Unions (AQA A Level Economics)

Price stability

• The common currency eliminates exchange rate fluctuations, reducing transaction costs and increasing price stability within the union

Limited monetary policy flexibility

• Member countries relinquish control over their monetary policy decisions to a regional authority, such as the European Central Bank in the case of the Eurozone

• This restricts a country's ability to independently adjust interest rates or implement policies tailored to its specific economic conditions, potentially hindering its ability to address domestic economic challenges

Increased trade and market access

• A single currency makes it easier for businesses to engage in cross-border trade within the union, leading to increased trade and economic growth

Loss of exchange rate control

• Countries in a monetary union lose the ability to adjust their exchange rates to maintain competitiveness

• They cannot rely on currency devaluation or revaluation to restore competitiveness or rebalance their economies

Enhanced monetary policy credibility

• Having a credible and independent central bank that follows a transparent monetary policy promotes investor confidence in all countries within the union (even weaker ones)

Fiscal constraints and policy coordination

• Countries must adhere to strict budgetary rules, deficit and debt limits, and coordinated fiscal policies

• This constraint limits a country's fiscal policy autonomy and can create challenges during economic downturns (recession)