Single currency

economic-dictionary

The single currency is the unit of exchange adopted by different countries. This, as part of a process of economic integration, like the European Union.

In other words, we refer to a situation in which several economies use a single currency.This is the case, for example, of the euro in the euro area, or of the dollar in all states that are part of the United States.

At this point, we must remember that there are different levels of economic integration. Well, we have from trade agreements to economic unions, where all fiscal and monetary policies are harmonized.

Likewise, we must point out that the monetary union is considered almost the last phase of economic integration, with a lower degree of coordination than that of the economic union.

The monetary union, therefore, consists of the countries involved adopting the same currency. Thus, a common monetary policy and a certain level of coordination in fiscal policies are required. That is, the actions with respect to the reference interest rate and the issue of money must be the same. For this reason, in the euro area, for example, there is the European Central Bank (ECB), which is the authority in charge of directing economic policy.

Advantages and disadvantages of the single currency

Among the advantages of the single currency we can mention the following:

  • It allows a greater commercial exchange between the countries involved.
  • It eliminates the risk of the exchange rate for investors who want to place their money in the other country. In other words, a German investor does not face the risk of the Spanish currency being devalued if he wants to make an investment in that country, for example.
  • Continuing with the previous point, the flow of investment between the countries involved is encouraged.

However, we also have some disadvantages.

  • We should point out that, perhaps, the main disadvantage of a single currency is that it demands the harmonization of economic policies in countries that may face different circumstances.
  • Continuing with the previous point, let's imagine that there are two countries that have a single currency. The first country faces a stage of economic expansion, while the second is rather suffering a recession. What the theory indicates is that the first country can raise its reference interest rate and apply austerity policies. However, the country in recession would have to reduce its reference interest rate, implementing a countercyclical monetary policy that, in this case, would be expansionary; at the same time, it should not apply austerity measures, such as lower public spending. However, if they share a single currency, both countries have to take measures in the same direction, that is, similar.

Single currency example

As we mentioned previously, a classic example of a single currency is the euro, present in all the European countries that adopted it.

The euro began to circulate in 2002. However, since 1999, the euro was officially operating and all the local currencies of most of the nations involved were linked to the euro based on a fixed price. This, depending on the strength of each currency.

At the time of writing this article, the countries that have adopted the euro are 19 of the 27 members of the European Union: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania , Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.

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