A monetary union is when two or more sovereign countries use the same monetary unit.
A monetary union refers to the practice of two or more sovereign countries using the same monetary unit. In other words, countries do not have a currency unit specific to their country and it can only be used within that country. The advantage of a monetary union, the most famous recent example of which is the European Monetary Union, is that it eliminates exchange rates between countries that use the same currency. On the contrary, the disadvantage is that any country involved loses the autonomy to make monetary decisions that may be necessary to help its economy.
The countries of the European Union that use the euro are considered part of an economic and monetary union.
All societies must devise a monetary system, which is how products compare to each other in terms of value. It serves as the basis for transactions and is usually made by the state or country itself, like the US dollar. However, there are examples throughout history of different societies coming together under a common currency. When this happens, a monetary union is formed, which means that all internal sovereign states are united by one currency.
In recent years, the best-known example was the creation of the European Monetary Union, or EMU, in 1999. The EMU established the euro as the general mode of currency in its member states, first virtually in 1999, to be followed by banknotes and coins issued in 2002. The countries participating in the EMU had already used their own individual forms of currency in the past, but all switched to the euro in all transactions, both within their own country and with other EMU members .
The ability to trade with other member states and not have to worry about currency values is one of the main advantages of a monetary union, which is sometimes also called a currency union. For example, when the United States trades with Japan, it should care about the value of the Japanese yen (JPY), just as Japan should care about the US dollar (USD). In an arrangement like EMU, exchange rates are unnecessary, which means that governments within the union do not need to hedge against falling foreign currencies.
Autonomy over monetary decisions is sacrificed when a country joins such a union, which is a crucial consideration that must be made. For example, if Italy, a member of the EMU, wanted to raise the exchange rate to help with production problems within the country, it could not do it on its own. The problem would have to be addressed throughout the EMU, which would then act as a group only if the rest of the members deemed it appropriate.