The Legal and Political Framework of Euroization

Abstract: As currency crises revealed the limitations of pegging a country’s currency to another country’s currency through currency boards, the focus of the monetary community turned to dollarization and euroization. De jure dollarization/euroization is the unilateral adoption of the dollar/euro as sole legal tender in lieu of the prior domestic currency through a formal political decision, thereby irreversibly giving up the chance to influence money supply and exchange rates through national monetary and political authorities. After showing the origins of unilateral euroization, the article lists the costs and benefits of currency replacement and identify which countries could most probably benefit from euroization. In the second part, it explains why European Union (EU) institutions – in contrast to US policy makers with respect to dollarization – oppose the unilateral adoption of the euro. Then, it describes the official route for euroization envisaged by the EU and finally focuses the discussion on whether EU institutions can legally prevent unilateral euroization under European or international law and whether the involved states have any other rights or obligations under customary international law. Furthermore, it shows the implications of the current financial crisis for future trends of euroization.