Can a single-currency world work?

Timothy Geithner, the US Treasury Secretary, admitted in March 2009 that he was very receptive to the possibility of a single currency run by the International Monetary Fund (IMF). While several people were taken aback by this unusual announcement, the concept of a global currency is not recent. Indeed, John Maynard Keynes, the legendary economist, is one of the most widely quoted proponents of a single currency. For the last 70 years, plenty of Keynes’ theories have gone in and out of favor. We have a lot of different currencies in the world and the economic activities are way harder than they would be the other way around. On the other hand, the global economy is so complex and various, the question is could a single currency, on the other hand, actually work?

Benefits of Single Currency market

With a world currency, there will be enough for everybody. Since there would be no exchange danger of foreign trading, all nations would prosper. Traders will no doubt be forced to hedge their bets in order to protect themselves from currency volatility. All international finance trade fees will be reduced as well.

Exchanging currencies often requires a swap, which banks charge as a bill, and changing one currency to another will result in a loss in value. Individuals moving overseas, as well as companies operating in other countries, will profit. According to economic statistics, after European countries adopted the euro, trade costs were reduced from €13 billion to €20 billion a year. Furthermore, removing a currency barrier allows countries to exchange more freely. Again, using the European Union as an example, adopting the Euro expanded trade between member countries by 5% to 20%.

Furthermore, with one currency, the global playing field will be somewhat leveled, as countries like China would no longer be able to use currency exchange to make their exports affordable on the global market. China has been manipulating its currency for a long time, undervaluing it and thereby making the price of its products more competitive around the world. Many countries’ economies have suffered as a result of this. China would not be able to do that, nor would it have a basis to do so, if there were only one world currency. Not only it would affect the different countries’ policies but those who are giving people services in terms of exchanging currencies, such as currency trading brokers online or offline, would not be able to execute their activities, and the capital that is accumulated in their companies is enormous. On the other hand, the adoption of a stable currency, which would serve as a foundation for potential economic growth, would also help developing countries significantly. Zimbabwe, for example, saw one of the world’s worst hyperinflationary crises. In April 2009, the Zimbabwean dollar had to be replaced by international currencies, including the US dollar.

Disadvantages of Single Currency Market

The lack of autonomous monetary policies to control national economies would be the most apparent disadvantage of a common currency. For example, after the 2008 financial crisis in the United States, the Federal Reserve was able to reduce interest rates to historic lows and expand the money supply to boost economic growth. These activities helped to mitigate the seriousness of the situation. This form of aggressive control of a national economy would not be feasible under a foreign currency. It was impossible to implement monetary policy on a country-by-country basis. Rather, any monetary policy adjustment will have to be taken on a global scale. Despite the increasingly multinational nature of trade, each country’s economy is distinct and requires separate management. If all countries were subjected to the same monetary policies, it would almost certainly result in policy decisions that benefited certain countries to the detriment of others. Typically, this will have a negative effect on developed countries rather than emerging countries. Germany, for example, had to bail out Greece when the economy was on the verge of ruin, paying billions of euros to save the country from declaring bankruptcy.

Supply and Money Printing

As for all major currencies, the supply and printing of a global currency must be controlled by a central banking authority. When we see the Euro as a model, we can see that it is governed by a supranational body, the European Central Bank (ECB). A treaty among the members of the European Monetary Union formed this central bank. The European Central Bank would not answer only to any one country in order to prevent political bias. The ECB is expected to report on its activities on a daily basis to the European Parliament and many other supranational groups in order to ensure adequate checks and balances.

Summing It Up

Finally, to sum up, at this time, it seems that adopting a common currency across the world will be very difficult. Indeed, the general consensus is that a dual solution is preferable. In certain countries, such as Europe, increasingly embracing a common currency may have significant benefits. However, attempting to impose a national currency in other countries will certainly do more harm than good. The different currencies give countries the opportunity to use the difference to their advantage and even though the economic relations are difficult in this case than it would be the other way around, a single currency market would not make authorities able to make changes in the economic policy while facing inflation or economic crisis.