Economics, 3rd Edition

COMMON CURRENCY 

AREAS AND EUROPEAN 

MONETARY UNION

common currency area

 a geographical area throughout which a single currency circulates as the medium of exchange

Usually we speak of common currency areas when the people of a number of economies, generally 

corresponding to different nation states, have taken a decision to adopt a common currency as their 

medium of exchange, as was the case with the European monetary union. Let’s start by taking a closer 

look at EMU and its currency, the euro.

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760  PART 15  INTERNATIONAL MACROECONOMICS

The single European currency – the euro – officially came into existence on 1 January 1999 when 

12 countries adopted it (although Greece did not join the EMU until 1 January 2001). On this date, exchange 

rates between the old national currencies of euro area countries were irrevocably locked and a few days 

later the financial markets began to trade the euro against other currencies such as the US dollar, as well 

as to trade securities denominated in euros.

The period from the beginning of 1999 until the beginning of 2002 was a transitional phase, with 

national currencies still circulating within the euro area countries and prices in shops displayed in both 

euros and local currency. On 1 January 2002 the first euro notes and coins came into circulation and, 

within a few months, the switch to the euro as the single medium of exchange was complete throughout 

the euro area.

The formation of EMU was an enormously bold step for the 12 countries initially involved. Most of the 

national currencies that have been replaced by the euro had been in circulation for hundreds if not thou-

sands of years. Why did these countries deem it so important to abandon these currencies and adopt a 

single, common currency? Undoubtedly, part of the answer to this question lies in the realm of politics 

as much as in the realm of economics. However, there was also a belief that having a common European 

currency would help ‘complete the market’ for European goods, services and factors of production that 

had been an on-going project for much of the post-war period. More generally, the costs and benefits of 

adopting a common currency can be analysed within the framework of macroeconomic theory. Let’s start 

by taking a look at the euro and its relationship to the Single European Market.