By Nicola Sudan

In just over a decade, the European Monetary Union (EMU) has brought together 17 countries under one currency, with more lining up. Proof that monetary unions are slowly replacing national currencies? Maybe. However,  it should not be forgotten that in the same decade that the euro was launched, a dozen new national currencies, issued by a dozen newly-independent states, sprang to life in the wake of the collapse of the Soviet Union, in a surge of national pride that cast aside that union's common currency, the Soviet ruble.

Monetary unions and independently-managed national currencies have been living - and dying - in respectful co-existence for many years; there seems to be a time and a place for each in the history of individual nations and geographical regions.

Not all monetary unions have stood the test of time. One of the earliest was the Latin Monetary Union, conceived by France in the mid-1800s. At its peak, it had 18 European members. The union had no single currency, but its members' national currencies were pegged to a silver/gold standard. It was dismantled in 1926 due to a lack of common monetary policy and central bank.

Colonial and Dollarised Unions

The older monetary unions still existing today mainly arose from colonial relationships.

In the 1800s, Great Britain created a series of common currency zones, tied to the pound sterling through currency boards. Exchange rates were pegged to the pound and full sterling backing was required for new issues of colonial money. One such board was the British Caribbean Currency Board. This would later become the Eastern Caribbean Central Bank, issuing the Eastern Caribbean dollar for six independent microstates and two British overseas territories. This union has functioned without serious difficulty since its inception.

France was another imperial power that consolidated the currencies of its many African dependencies into le franc des Colonies Françaises d'Afrique (CFA franc). When these colonies became independent, the CFA franc was replaced by two regional currencies which preserved the 'CFA' appellation: le franc de la Communauté Financière de l'Afrique, for the eight members of the West African Monetary Union; and le franc de la Coopération Financière Africaine, for the six members of the Central African Monetary Area. Both currencies are today managed by the French Ministry of Finance as a single monetary union, called the CFA Franc Zone.

Elsewhere, imperial powers preferred a dollarisation-type regime, where they used their own currencies in their own colonies. Dollarisation is used today in countries, such as Panama and Liberia, which have special ties to the United States. Other long-time 'dollarisers' include Pacific Ocean microstates that were once administered by the US. More recently, the dollar replaced failed currencies in Ecuador, El Salvador and Zimbabwe (albeit that the latter is likely to be a temporary measure), and was adopted by East Timor when that state regained independence in 2002.

Dollarisation not only applies to the US dollar, but to any foreign currency that is used as - or in parallel to - the national currency. The euro is the official currency of Monaco, Vatican City, Andorra, Kosovo, San Marino and Montenegro. The New Zealand dollar, Swiss franc, Indian rupee, and Australian dollar are also used for official dollarisation by other countries.

The South African rand used to be a local form of dollarisation in the Common Monetary Area (CMA) in Southern Africa, where it was the sole legal tender in Botswana, Lesotho, Swaziland, and Namibia. But when these countries became economically stronger, they created their own currencies, and Botswana pulled out of the union completely. Today, the remaining three countries in the CMA continue to peg their currency to the rand, but are no longer bound by currency board-like provisions on money creation and may vary their exchange rates at will.

In the case of dollarization (or eurorisation), the countries in question are supplied with their banknotes, while some mint their own coins with national symbols - albeit in the same denominations as the 'mother' currency.

The Euro - an Unprecedented Experiment

The most dramatic episode in the history of monetary unions is the EMU. A group of 11 fully independent states voluntarily replaced their national currencies with a single new currency - the euro - and delegated all their monetary sovereignty to the European Central Bank (ECB). This was not like the Eastern Caribbean Union or CFA Franc Zone, where members had inherited colonial arrangements; nor was it the same as small economies surrendering monetary sovereignty to an already-proven currency. The EMU members were some of the biggest national economies in the world, engaged in an experiment of unprecedented proportions.

During its first ten years, the euro did well: the Eurozone average inflation rate descended to 2% and unemployment was at its lowest since the early 1980s. Not surprisingly, the euro stimulated interest in creating similar monetary unions in other parts of the world.

But two years on, with sovereign debt issues affecting five out of the now 17 Eurozone countries, there are looming doubts about the long-term survival of the euro, and speculation that some countries may return to a national currency.

Critics say that the Eurozone was never an optimal currency area to begin with: it has a relatively low labour mobility rate and cannot rely on fiscal federalism to smooth out regional economic disturbances. It is also argued that Europe is too diverse in terms of culture and language.

Countries that are in the euro 'waiting room' are now reconsidering their positions. And other monetary unions in the pipeline are on hold, watching to see what happens with the euro.

One such union is in the Middle East.

The Gulf Monetary Union

It has been said that the six countries of the Gulf Cooperation Council (GCC) - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE - could create a single currency zone that is more optimal than the Eurozone: they have cultural and linguistic homogeneity, and already enjoy strong economic convergence, after being anchored to the US dollar for more than 20 years.

So why do they still not yet have monetary union?

A launch date had been set for 2010; but in 2006, Oman pulled out of the union, followed by UAE in 2008 (after disagreeing with the location of the joint central bank). These setbacks, in addition to Kuwait's 2007 decision to cut itself loose from the US dollar, dramatically slowed the progress of the union, and put into question the strength of the political will behind it.

Nevertheless, interest was revived during the 2009 GCC summit, and three months later, a joint monetary council was launched to lay the foundation for a regional central bank and a single currency.  

That was in March ... in December, on the eve of the 2010 summit, it was reported that there was now little appetite for a single Gulf currency and that the main focus of the summit would be on removing trade barriers.

For any monetary union to be successful, it must be backed by strong political will - which was the case for the euro. In the case of the Gulf Monetary Union, it remains to be seen how much political will can be resuscitated once the current financial crisis subsides and the future of the euro is clearer. 

Grand-Scale Unions

Elsewhere in the world, unions on a grand scale have been brewing for some time, spurred on by the success of the euro; but it is not clear when - or even if - they will see the light of day.

One is the African Monetary Union - a continental union for the 53 countries of the African Union, administered by the African Central Bank. Such a union would call for a new unified currency, similar to the euro, sometimes referred to as the Afro. It would rely on the prior creation of unions in five regional economic communities, an intermediate stage that would lead to their ultimate merger. The closest region to achieving this union is the East African Community, while a similar union for West Africa is also an objective for those countries.

Another is the Asian Currency Unit (ACU) - a proposed basket of currencies for ASEAN + 3, which unites the Association of Southeast Asian Nations with China, Japan, and South Korea. The ACU was inspired by the now-defunct European Currency Unit that preceded the euro. Rather than a single currency, the ACU is a weighted index of East Asian currencies that will function as a benchmark for regional currency movements.

Towards a Single Global Currency

Ironically, while some monetary unions are stalling in the wake of the global crisis, pressure is building from prominent leaders, central bankers, the UN and the IMF to completely overhaul the global monetary system, and introduce a supranational world currency to stabilise financial markets.

Such calls are nothing new. In 1945, political leaders met at Bretton Woods, USA, to plan the post-war economic order. Proposals were made for the creation of a world currency; instead, the leaders agreed to the crowning of the US dollar as the world reserve currency.

From as early as 1971, after its decoupling from gold, the dollar's reign started to be challenged. Today, the challenge is even greater.

French President Nicolas Sarkozy said that world powers 'should think together about a new international currency system' at the upcoming G20 summit in November. He also said the world's financial system was 'outdated'.

Former Federal Reserve boss and current chairman of President Obama's Economic Recovery Advisory Board, Paul Volcker, is widely reported to have said, 'a global economy needs a global currency.'

In China, the central bank head Zhou Xiaochuan said, 'the desirable goal of reforming the international monetary system is to create an international reserve currency that is disconnected from individual nations and able to remain stable.'

Economics Professor Robert Mundell - known as the 'father' of the euro - sees a world currency being implemented in three stages: first, stabilisation of exchange rates; next, a monetary union of most of the world's economy, under a basket of dollars, euros and yen (or DEY), issued by a global central bank (possibly the IMF); and finally, the creation of a truly global fiat currency.

Other prominent advocates agree with Mundell. 'We'll probably get there by the merger of monetary unions,' explained Morrison Bonpasse, founder of the Single Global Currency Association. 'Another way is for smaller countries to continue to 'dollarise' or 'euroise' their legal tender. Once the point is reached where one currency supports 40-50% of the world's GDP, the movement will accelerate to anoint that currency as the single global currency.'

In the meantime, monetary unions, dollarisation and national currencies will continue to co-exist: new currencies will continue to emerge, as symbols of new-found independence (such as, most recently in South Sudan); smaller countries will continue to 'dollarise' (such as the Caribbean islands of Bonaire, Saba and St Eustatius); and regional communities will form new monetary unions (such as the one currently moving ahead in the East African Community).

In other countries, however, the national pride associated with their currency is so strong, that it will not be relinquished without fierce public outcry. Opposition in the UK, Sweden and Denmark to the euro are cases in point. The spat over the location of the central bank for the proposed Gulf currency also demonstrates how national pride can impede, if not derail, such proposals.

National pride aside, there is also the thorny issue of the price countries are prepared to pay in terms of loss of economic and fiscal sovereignty - an issue that is weighing heavily at the moment in the eurozone.

The road towards a global monetary union is going to be long and bumpy.