Most of the time, currencies are tied to specific countries. A country’s currency is an expression of its economic and political power, and a barometer of its global influence. A more valuable domestic currency means global demand for that money, and demand for the products that are bought for that money, so why would any country give up its ability to compete in the global trade and financial markets?
This article looks at multinational currencies like the Euro, CFA Franc and EC Dollar, and asks what advantages are enjoyed by countries that choose to conduct trade and commerce without their own national currency. There are currently over 30 countries that fall under the purview of these three currencies – countries that are banking on collective rather than individual success to guarantee their long-term success. In this resource article, you’ll learn why these currencies were created and the purpose they serve where they operate.
Why a Currency Union for Europe?
Multinational currencies exist for the exact opposite reasons that national currencies do – to reduce competition and strengthen ties between nations.
The architects of the Euro lived through the aftermath of World War II and were determined to prevent Europe from ever destroying itself in the same ways again. This conviction about avoiding conflict led to the establishment of the European Economic Community in the 1990s and eventually became the European Union.
Source: Banknote World
Cooperation rather than confrontation is at the heart of the European Union – if countries trade with each other and are bound together politically and though monetary policy, they are less likely to war with one another. Although there are 27 members of the European Union, not all of them have adopted the Euro as their official currency – the United Kingdom, Norway, Sweden and Denmark have all chosen to keep their own currencies.
Western Africa and the CFA Franc
Source: Banknote World
A currency union makes sense in Western Africa as a means of maintaining ties to French colonial heritage. The nations of West African were all French colonies, and it was the French that issued the first francs to the colonies and continued to do so between 1945 and 1962. The Central Bank of Western Africa was later established to continue supplying money to the nations that trade the CFA franc.
In this case, a currency union was born out of a shared colonial heritage and not necessarily a desire to mitigate conflict by combining national institutions. Still, West Africa remains unified by the CFA franc which is traded commonly in Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal, Togo, Cameroon, Chad, The Republic of the Congo, Equatorial Guinea, Gabon and the Central African Republic. The over 150-million inhabitants of these nations make the CFA franc one of the most widely used global currencies.
Eastern Caribbean Currency
The Eastern Caribbean dollar is another currency born out of colonialism. The British government formalized the dollar system of accounts in British Guiana in 1949 and introduced the British West Indian dollar throughout the Eastern Caribbean territories that it controlled. Jamaica ended the legal tender status of the BWI$ in 1964 and Trinidad and Tobago adopted their own national currency in 1964, and the following year, the British West Indian dollar was replaced by the Eastern Caribbean Dollar with its headquarters moved to Barbados.
Today, the Eastern Caribbean Central Bank is based in the city of Basseterre in Saint Kitts and Nevis. The Eastern Caribbean dollar is used as official currency by the 625,000 inhabitants of Anguilla, Antigua & Barbuda, Dominica, Grenada, Montserrat, Saint Kitts & Nevis, Saint Lucia and Saint Vincent & the Grenadines.
Source: Banknote World
Risks of a Multinational Currency Union
Currency unions face criticism for several reasons. Firstly, the centralization of power may not benefit each of the member states in a currency union. Imbalances in trade lead to unequal wealth distribution within currency unions – Greece imports more goods than it exports, so it is constantly losing cash to Germany and other economic powers within the EU. This creates deflationary pressures that can only be resolved by going deeper in debt to maintain the money supply, or by “structural distribution” – essentially welfare between the haves and have-nots of the EU.
Conclusion
Currency Unions are a method of unifying nations and building economic and political ties that can prevent warfare. Most currency unions today have been born out of colonial heritage, and the European Union remains in its infancy, an experiment in mutual understanding and a challenge for prosperous nations to work together and facilitate ongoing growth and shared success. Although there are compromises to be made, currency unions can be successful when they take care of their member states and stay together.
