Monetary Union:

A monetary union is a form of economic integration when two or more countries with a single currency or different currencies having a fixed mutual exchange rate are monitored and controlled by one central bank (or several central banks with closely coordinated monetary policies). A monetary union may be defined as a group of two or more states sharing a common currency or equivalent. The idea of monetary union among sovereign states was widely promoted in the nineteenth century, mainly in Europe, despite the fact that most national currencies were already tied together closely by the fixed exchange rates of the classical gold standard. Monetary union means complete abandonment of separate national currencies and full centralization of monetary authority in a single joint institution. In reality, considerable leeway exists for variations of design along two key dimensions. These dimensions are institutional provisions for (1) the issuing of currency and (2) the management of decisions. Currencies, tied together in an exchange-rate union may continue to be issued by individual governments. On the other hand, currencies may be replaced not by a joint currency but rather by the money of a larger partner, an arrangement generically labeled dollarization after the United States dollar. Similarly, individual governments may continue to be exercise monetary authority in some degree. The greatest attraction of a monetary union is that it reduces transactions costs as compared with a collection of separate national currencies. With a single money or equivalent, there is no need to incur the expense of currency conversion or hedging against exchange risk in transactions among the partners. The most dramatic episode in the history of monetary unions is of course EMU, in many ways a unique undertaking -- a group of fully independent states, all partners in the European Union, that have voluntarily agreed to replace existing national currencies with one newly created money, the euro.