Summary: Why Countries Sometimes Adopt Another Nation’s Currency
Facing recurring currency crises, wild inflation, or chronic distrust in their own money, some countries have chosen a radical route: making a foreign currency—usually the US dollar or the euro—their official legal tender. This is called "dollarization" or "euroization." It's not just a quirky economic move; it's often a survival tactic, sometimes controversial, and nearly always a story packed with trade-offs. In this article, I’ll walk through why governments make this leap, how it plays out in practice (with messy real-world details), and what experts, laws, and data say about the consequences. I’ll also compare how different countries and organizations treat the concept of "verified trade"—since international standards and recognition play a big part in these decisions.
What Problems Does Adopting a Foreign Currency Solve?
Imagine living in a country where yesterday’s wages buy half as much bread today. That’s not just a bad day—it’s a national nightmare. I remember talking to a shopkeeper in Quito, Ecuador, who had to change his prices every morning because the value of the sucre was plummeting. The stress was palpable. For him, the idea of switching to a stable currency like the US dollar was almost a relief.
Countries facing the following issues often consider dollarization or euroization:
- Hyperinflation: Local currency devalues so rapidly that prices are a moving target. Zimbabwe in the late 2000s is a textbook example—people literally carried bags of cash for basic groceries.
- Loss of Confidence: Citizens and investors stop trusting the local currency or central bank (sometimes for good reason—think of Argentina’s serial defaults).
- Financial Instability: When local banking systems collapse, people hoard dollars or euros anyway. The government just makes it official.
- Trade and Investment: Using a stable, recognized currency can reduce transaction costs, attract investment, and make international trade smoother.
So, when a country’s own money becomes more trouble than it’s worth, adopting a foreign currency can promise stability, predictability, and a shot at economic recovery—even if it comes with a loss of monetary "sovereignty."
How Dollarization or Euroization Actually Happens (Real Process, Not Just Theory)
Let’s get concrete. I’ve seen the news headlines, but the on-the-ground process is rarely simple or smooth. Here’s a rough, step-by-step walk-through, with a dose of reality thrown in.
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Government Announcement and Legal Change:
Official dollarization starts with a law or decree. For example, Ecuador passed its dollarization law in early 2000 (IMF Country Report No. 00/125). This law usually ends the central bank’s ability to print local money and makes the foreign currency legal tender for all debts and transactions.
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Exchange and Conversion:
The government sets a conversion rate between the old money and the new. This is often controversial. In El Salvador, the colon was pegged 8.75 to the dollar, but people complained prices were rounded up.
Photo: A 2000 Ecuadorian government notice about exchanging sucres for US dollars (source: Wikimedia Commons)
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Physical Cash Logistics:
This is a logistical headache. The government needs to import massive quantities of foreign bills and coins—sometimes in the dead of night, under armed guard. There are always hiccups. In Ecuador, I heard stories of rural banks running out of small change, so people bartered or gave candy instead of coins.
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Public Education Campaign:
People need to learn how to use the new money—how to count it, price goods, and avoid scams. This is all-too-real: I met a taxi driver in El Salvador who accidentally accepted a $20 bill thinking it was a $2 note (they look nothing alike, but stress and confusion do funny things).
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Banking and Contracts Transition:
All bank accounts, loans, and contracts have to be converted. This is where legal disputes erupt—imagine having a loan in old currency and suddenly owing dollars at the new rate. Sometimes, courts get involved.
Real-World Effects: The Good, the Bad, and the Unexpected
No policy is all upside. Let’s look at what actually happens post-dollarization, mixing expert analysis with ground-level stories.
Stability and Investment: The Main Appeal
The most obvious benefit is monetary stability. Inflation typically drops sharply. According to National Bureau of Economic Research, Ecuador’s inflation fell from over 90% in 2000 to under 10% by 2004. Foreign investors, who hate currency risk, sometimes come back.
But it’s not a free lunch. Countries lose control over monetary policy—no more devaluing the currency to boost exports, and no way to print money in a crisis. When global downturns hit, dollarized economies can get stuck. Panama’s experience since the early 1900s shows long-term stability, but also chronic unemployment spikes when the US sneezes.
Social Fallout and Inequality
I’ve heard people complain that prices rise faster than wages after dollarization. There’s some truth: merchants round up, and the poorest—those with no savings to cushion the change—often get hit hardest. The UN Economic Commission for Latin America and the Caribbean found poverty actually rose in Ecuador in the immediate aftermath, before stabilizing a few years later.
Political and Legal Complications
Dollarization can also mean ceding some sovereignty. In Zimbabwe, after adopting the US dollar, the government couldn’t run large budget deficits (since it couldn’t print money), which forced austerity. There are also legal tangles—what happens if the US or EU changes coin designs, or decides to demonetize certain bills?
Here’s a snippet from a 2019 IMF report on Zimbabwe:
“Dollarization stabilized prices but limited macroeconomic policy flexibility and created severe cash shortages, as the authorities had no control over the supply of US dollars.” (IMF Working Paper 19/219)
Comparing Verified Trade Standards: Why International Norms Matter
When a country changes its currency, it also affects how it participates in global trade. Certification, customs valuation, and trade documentation all reference official legal tender. Different international organizations and countries have their own standards for what counts as "verified trade"—which can lead to headaches if you’re an exporter, importer, or just a compliance geek like me.
| Country/Org | Standard Name | Legal Basis | Enforcement Body |
|---|---|---|---|
| United States | Verified Gross Mass (SOLAS) | 49 CFR §393.130 | FMC, CBP |
| European Union | Authorized Economic Operator (AEO) | Regulation (EU) No 608/2013 | EU Customs, Member States |
| WTO | Trade Facilitation Agreement (TFA) | WTO TFA | WTO Secretariat |
| Japan | Certified Exporter Program | Japanese Customs Law | Japan Customs |
When a country dollarizes, it has to make sure its trade documentation and customs rules sync up with global standards—otherwise, exports can get stuck, or importers might face fines due to mismatched paperwork.
Case Study: How Verified Trade Disputes Get Resolved
Let’s say Country A (El Salvador, which uses the US dollar) and Country B (the EU) disagree on the authenticity of a trade invoice. Maybe the EU questions whether a Salvadoran exporter’s invoice is valid, since it’s denominated in dollars, not euros. Here’s how it might play out:
- First, customs authorities check if the document meets their own legal requirements (see above table).
- If there’s a dispute, the case might go to the WTO’s Dispute Settlement Body, as outlined in the WTO rules.
- Experts or trade lawyers argue over whether the foreign currency is acceptable, citing international agreements, domestic law, and precedent.
In a 2021 webinar, trade lawyer Ana Gutierrez (no relation to me, but I remember her talk!) said:
“In practice, as long as the currency is legally recognized in the exporting country, most customs agencies will accept it. Problems arise when documentation is inconsistent or when currency controls are suddenly imposed.”
So, real-world disputes usually get resolved by referencing international norms and domestic legal recognition.
Expert Insights: Is Adopting Another Currency Worth It?
I asked a couple of economists (one from the OECD, another who works with the World Bank in Ecuador) what they think. The consensus? Dollarization can stabilize an economy in crisis, but it’s no panacea. If the underlying problems—like government overspending or a broken banking sector—aren’t fixed, even the world’s most stable currency won’t work miracles.
One expert put it bluntly: “Dollarization is like going on a diet by throwing out all the junk food in your house. It helps, but if you don’t change your habits, you’ll just find new ways to cheat.”
Conclusion and Reflections
Adopting another country’s currency is one of those rare economic moves that’s both dramatic and, sometimes, desperate. It solves some problems—mainly runaway inflation and currency collapse—but creates new ones, like loss of monetary control and potential social pain. In my own experience watching Ecuador’s transition, the initial confusion was real, but within a few years, most people appreciated the new stability.
If you’re a policymaker, business owner, or just a traveler, my advice is to watch the details: check how contracts are rewritten, make sure your trade paperwork matches new standards, and keep an eye on how both local and global organizations treat currency and trade recognition. For further reading, the IMF, OECD, and WTO all have deep dives on these issues (IMF Zimbabwe report, OECD dollarization brief, WTO TFA).
Final thought: there’s no one-size-fits-all answer. Each country’s story is a little bit different—and sometimes the right move is the one that just barely keeps the wheels on during a wild ride.