The Use of the Euro as a National Currency Substitute

The subject of this paper is the use of the euro as a national currency substitute, a process known in the economic literature as euroisation. The advantages and disadvantages of this process are briefly discussed. The paper presents a theoretical model of a currency crisis in an economy with a currency board arrangement. Because of the possibility of a devaluation of the local currency and of involvement of the ECB in costly bail-out operations, it is concluded that the European Central Bank should support rather than oppose euroisation, at least in countries in which the euro is a reserve currency.