26 Monetary Union
A monetary union refers to a group of countries that share a common currency and a joint central bank responsible for setting monetary policy across the union. One of the most well-known examples of a monetary union is the Eurozone, where 20 out of the 27 European Union (EU) member states have adopted the euro (€) as their official currency. The euro is managed by the European Central Bank (ECB), which sets a unified monetary policy for all euro area countries.
The main objective behind forming such a union is to enhance economic integration, reduce exchange rate uncertainty, facilitate trade and investment, and foster a sense of unity among member states. By eliminating currency conversion costs and exchange rate volatility, a common currency can help deepen the internal market and improve economic efficiency across borders.
However, while a monetary union provides certain economic benefits, it also introduces major challenges – especially when it is not backed by a political union. This is a key concern that has been raised by many economists, including Professor Malcolm Sawyer, a well-known critic of the structural weaknesses within the Eurozone. His argument centres on the idea that, without political unification, a monetary union becomes inherently fragile.
The United States is often cited as an example of a monetary union that works well because it is supported by a strong federal government, a common fiscal policy, and mechanisms to transfer resources between states when needed. When one part of the US experiences economic hardship – say, due to a local recession or natural disaster – federal funds can be redistributed to support that region through unemployment benefits, public investment, or other fiscal tools. This helps stabilise the overall economy.
In contrast, the Eurozone lacks such a centralised political and fiscal authority. Although all member countries share the euro, each country retains its own national government, budget, and tax system. This means that when a country in the Eurozone faces an economic crisis, there is no equivalent of a European-level fiscal transfer system to support it. Instead, individual governments are often left to struggle with economic downturns without the ability to adjust monetary policy – since that is controlled centrally by the ECB – and with limited ability to conduct expansionary fiscal policy, due to strict budget rules under the Stability and Growth Pact.
This issue became highly visible during the Eurozone debt crisis following the global financial crisis of 2008. Countries like Greece, Spain, and Portugal faced deep recessions and high levels of public debt, but they could not devalue their currencies or print money to support their economies, as these powers rested with the ECB. Nor could they rely on large-scale fiscal support from stronger economies like Germany or France. As Professor Sawyer argues, this lack of political integration and solidarity leaves the monetary union structurally incomplete and vulnerable to asymmetric shocks.
The United Kingdom, even during its time as a member of the European Union, never joined the Eurozone. It retained its own currency, the British pound, and full control over its monetary policy through the Bank of England. The UK government was always sceptical of giving up monetary sovereignty without being part of a deeper political and fiscal union. British policymakers recognised that adopting the euro would mean relying on the ECB’s decisions – decisions that might not align with the needs of the UK economy. This concern, which reflects the broader debate about the risks of monetary union without political union, played a significant role in the UK’s decision to remain outside the Eurozone.
