Currency Unions (AQA A Level Economics)

Revision Note

Lorraine

Written by: Lorraine

Reviewed by: Steve Vorster

The Implications of Joining a Currency Union

  • A currency union, also known as a monetary union, is established when the members of a customs union and common market establish a common central bank which issues a common currency and controls the monetary policy of member countries

    • Prior to Brexit, the UK was a member of the European Customs Union and common market but never joined the Eurozone

    • At the start of 2023, 20 of the 27 countries in the EU were members of the Eurozone
       

Evaluating Currency Unions

Advantages

Disadvantages

  • 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)

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Lorraine

Author: Lorraine

Expertise: Economics Content Creator

Lorraine brings over 12 years of dedicated teaching experience to the realm of Leaving Cert and IBDP Economics. Having served as the Head of Department in both Dublin and Milan, Lorraine has demonstrated exceptional leadership skills and a commitment to academic excellence. Lorraine has extended her expertise to private tuition, positively impacting students across Ireland. Lorraine stands out for her innovative teaching methods, often incorporating graphic organisers and technology to create dynamic and engaging classroom environments.

Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.