The purpose of this term paper is to assess and discuss advantages and disadvantages of having a single currency at the global level. At first sight, the benefits and facility of a single currency are unquestionable. However, there is a clear and consistent need of tough-but-fair evaluation of the possible consequences of this.
Starting with the positive side, introduction of a single global currency can help the process of globalization and internationalization of business. Globalization itself being a controversial phenomenon, the advocates of the idea of free-market believe that the development of business is intrinsically linked to enhancement of social well-being. One may agree or disagree with it, yet under any scenario, the reduced cost of doing business can improve its efficiency and create grounds for innovation and better human resources management.
Transaction costs would be reduced not only for business. Banking system will also be alleviated from the burden of complex operations with different currencies:
‘To the extent that the foreign exchange work performed by multiple countries is replaced by the work of a single central bank, the total costs will be reduced’ (Bonpasse, 2006, p.121).
Instead, banks would concentrate on providing more meaningful services to the natural and legal persons, e.g. credits for business development.
It should be also kept in mind that exchange rate risks would be eliminated. As a consequence, the companies will be able to cut their hedge funds and allocate resources to other areas.
Another reason for the introduction of a single global currency is that the stability of financial system will be sustained by the whole world community. The impact of such negative trends as inflation will be shared by all the nations, developed and developing alike. This can contribute to greater equality among states and bridge the gaps between the rich North and poor South.
Moreover, policy discipline can be enhanced through a monetary union. A central bank of a certain country may become more legitimate and committed to price stability by delegating authority for monetary policy to a world central bank (Federal Reserve Bank of San Francisco, 2005).
It’s also necessary to mention that introduction of a single global currency makes price differences in different states more transparent, which encourages competition (Federal Reserve Bank of San Francisco, 2005). Competition, in turn, means that markets are healthier and more upbeat, and businesses are pressed to constantly improve their products to make them more relevant to the customer.
Generally, a single global currency would benefit the least developed countries in another way. Many businesses are afraid to enter the emerging markets for the ample reason that their currency is unstable. A single global currency would decrease the risks associated with doing business in the least developed countries and attract the flow of investment to their markets. It has been proven that monetary union eliminates exchange rate risk with neighboring states, which boosts trade among them (Federal Reserve Bank of San Francisco, 2005).
This can further contribute to eliminating disparities in the levels of economic development in different regions.
Taking a different approach, a single global currency could potentially ease certain ethnic conflict. The notion of statehood is closely connected to the existence of a national currency. This issue is relevant to a number of conflicts existing nowadays. Palestine can be held up as a prime example: the fierce debate over the primary currency to be used at its territory only deepens the conflict with Israel.
Furthermore, there are empirical examples of successful monetary unions that can’t be dismissed. Eurozone has proven to be a very beneficial endeavor — it also inspired the debate about a single currency in other regions of the world.
However, there are numerous disadvantages, too. The first that comes to mind is that the market would be filled up with false banknotes and coins. International criminal cartels would have a considerably easier job in forging currency notes.
Upon a deeper analysis, it becomes evident that a single global currency would result in vulnerability of the world economy. Let’s just recall the Asian financial crisis — high level of intraregional economic integration, even without a single currency, brought about such a horrible devastation of the financial system.
Indeed, ‘by delegating authority for monetary policy to a regional central bank, an individual country’s central bank loses independent monetary policy control and, therefore, the ability to stabilize the economy when it is hit by a shock’ (Federal Reserve Bank of San Francisco, 2005, ‘Is a Common Currency Desirable for East Asia?’, para.1).
Same source informs that it’s very important to conduct a thorough cost-benefit analysis. There exists an optimum currency theory, which holds that the need for independent monetary policy control is more significant in case the countries encounter different shocks and less considerable in case they are open to the same or similar shocks. High trade integration can lessen the probability of different shocks among the countries. High labor mobility and a system of global fiscal transfers can also reduce the risks involved in the process of introduction of a single global currency. In other words, ‘economic integration will tend to reduce the probability that individual nations (in contrast to regions) will be hit by asymmetric shocks’ (De Grauwe, 2000, p.28).
Since interest rate in intrinsically linked to currency rate, a single global currency would automatically mean the establishment of the same interest rate in all the regions of the world. However, this would hinder business activity: ‘if business cycles of major regions – US, Europe, Japan/Asia and other emerging markets – are not highly syncronized to begin with, a common world interest rate would not be optimal; it could be outright dangerous and destabilizing instead’ (Roubini, 2004, para.7).
Therefore, my personal opinion is that it would be beneficial to have a single global currency at some point in future. The world isn’t ready for it here and now. Taking into account the aforementioned economic reasons, greater trade ties, international labor mobility, and better coordination between different fiscal systems is a prerequisite for the successful introduction of a single global currency. All these factors are brought about by globalization. If globalization progresses at the present rate, it’s quite probable that the discussed conditions will emerge in the foreseeable future.
I also believe that introduction of a single global currency should be couple with the process of deeper political integration, since ‘monetary unions have been historically associated with political unions; and, indeed, EMU emerged as a stage of a drive towards political union in Europe. Monetary Unions without political unions have historically failed, as the Latin Monetary Union of the 19th century’ (Roubini, 2004, para.10).
Controlling and regulating a single global currency would require strong international institutions. At the moments, the world community isn’t ready to abandon the notion of a nation-state and move towards the creation of a world government.
On the practical level, it’s impossible to introduce a single global currency now. Countries of the world are very different in terms of economic development and stability of fiscal system, so making the idea of a single global currency sound like wishful thinking.
Bonpasse, Morrison. The Single Global Currency – Common Cents for the World. Newcastle, ME: Single Global Currency Association, 2006.
De Grauwe, Paul. Economics of Monetary Union. New York: Oxford University Press, 2000.
Federal Reserve Bank of San Francisco. ‘Does Europe’s Path to Monetary Union Provide Lessons for East Asia?’ August 12, 2005. November 4, 2006. <http://www.frbsf.org/publications/economics/letter/2005/el2005-19.html>
Roubini, Nouriel. ‘A Single Global Currency? Not Any Time Soon Nor in the Long Run in Which We Are All Dead.’ August 23, 2004. November 4, 2006. <http://www.rgemonitor.com/blog/roubini/91155>
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