With reference to the theory of optimum currency area, critically examine the conditions for successful adaptation of a single currency by a custom union to enhance trade.
Optimum currency area refers to a geographical area where adopt a single currency to do business in the entire region in order to improve the economic efficiency (Steven and Michael, 2007). Custom union is a type of trade bloc with two or more countries to remove trade barriers and reduce customs duty on mutual trade. Unlike a free trade area, customs union generally adopts a mutual external tariff on imports from non-member countries and generally does not allow the capital and labor moving without any restriction within member countries. The establishment of a certain monetary union is one of the most important conditions precedents for the success of the existing customs union. Also forming a union with a uniform currency will eventually result in the establishment of a certain common market which means countries can do business on capital, goods and services without any restriction.
The single currency is considered as a fundamental requirement for the establishment a common market and customs union. The countries in the member states should have a conscience on certain economic standards to set up an associated currency, as a joint currency will not be effective between two countries, especially the distance between countries is huge. A single currency will affect the economic condition of member states. A number of resolutions have been posted by the countries to their citizens which allows them carrying out various economic activities in any member state (Steven and Michael, 2007). The formation of a single currency will, to some extent, enhances trading business within this areas, booms common market and facilitates capital movement among the member states.