Economic Advantages and Disadvantages of a One Global Currency

Economic Advantages and Disadvantages of a One Global Currency Introduction The recent history of currency exchange rates includes 3 huge changes starting from the end of the XIX to the end of the XX century. Pure gold standard has been the basis for trading between nations during 1879 and 1914 (Abdel-Monem, n.d.). At the beginning of World War I, this standard ceased to exist and in 1920 countries permitted greater exchange rate flexibility (Jereissati, 1999), which however, did not last long and after the end of the World War II the Bretton-Woods system has been implemented. This standard has been created as a result of numerous meetings between the World War II winning states with the final conference taking place at the Hotel in Bretton Woods, New Hampshire. The standard took the name of this last conferences venue (Grabbe, 1996, as cited in Tucker, 2008). In August 15, 1971 Richard Nixon in his speech announced that the price of dollar will be no longer fixed against gold. This has put an end to the Bretton-Woods system and has set-off a new era in international monetary system. The main feature of this new system is that it is neither a pure gold standard nor a pure exchange rate float, but rather a system in between these two extremes (Meese, 1990). This standard exists until today and has been strongly undermined during the latest financial crisis. In this respect, the idea of having a single global currency is widely discussed as an alternative monetary system. This literature review outlines advantages and disadvantages of a single global currency. The Single Global Currency The Concept of a Single Global Currency Single global currency, as one can see from the example of Euro, signifies that countries, where this currency would be implemented, should be the members of a monetary union with one central bank, common currency, a coherent and binding financial policy. Scandinavian Currency Union (SCU), which included Denmark, Norway and Sweden, established a common currency unit, although central banks in each of those countries retained control over monetary policy and did not experience significant loss of independence (Bergman, 1999). The single global currency is a much more complicated issue. History recognizes a lot of monetary unions of different size, both formal and informal. However the most successful example came from the European Union, which is the Economic Monetary Union (EMU). There are also two proposed single currencies, which potentially may come near the Euro. They are the GCC monetary union currency and the Asian Monetary Unit. Economic Advantages of a Single Global Currency The advantages of a global currency are as follows. First of all, single currency will eliminate transaction costs, which are linked to international financial operations. This will affect both: ordinary citizens who plan to spend money abroad and multinational corporations undertaking international transactions. Different currencies create a lot of inconveniences and barriers. Exchanging one currency for another always involves currency exchange fees, as banks, which provide such currency exchanges, require commissions for their services. In the scale of countries or even monetary unions such expenditures on currency exchange fees may reach high amounts. By eliminating the need for currency exchange the monetary unions may save resources (Buiter, 1999, as cited in Bonpasse, 2008). For instance, the European Commission (EC) has estimated that due to a single currency across the European Union 13 to 20 billion of Euro were saved per year (Grauwe, 2007). Moreover the difference between the currencies exchange rates becomes an obstacle for a free flow of trade. As the barrier of different currencies will disappear, the number of international transactions will increase. Bordo and James (2006) said that neighboring countries, which are members of a common monetary union, tend to trade more frequently with each other. In a study conducted by Micco, Stein, and Ordonez (2003) they found out that trade between EU members increased by 8 to 16%, after EMU was created (as cited in Lane, 2006) Currency risks nowadays are one of the major disadvantages of the modern international financial system. Everything, ranged from a natural disaster to terroristic attack, may affect the value of the currency and as a result cause loss. Foreign investors, as well as stock holders, have to hedge their risk, which also demands additional expenditures. Implementation of the single global currency will eliminate the risk of loss, due to currency fluctuations. Moreover Bonpasse (n.d.) points out that the adoption of a single global currency will save 400 billion of US dollars annually in foreign exchange transaction costs, which come from trading 3.8 trillion US dollars every trading day. Currency misalignment is a process when central bank increases or decreases the value of its currency against another for different purposes. The most known cases of currency manipulation are the cases of China and Japan. Both countries artificially undervalued their currencies, which made their exports more competitive. As the value of Yen and Yuan decreases, the prices on Japanese and Chinese products will consequently fall. This has created a great advantage for Japanese and Chinese products in the market. Today the low value of these currencies, which has nothing to do with the real situation, has created huge difficulties for the economies of Europe and USA. Japan and China, based on all criteria related to the IMF definition, have been persistently manipulating their currencies to gain an unfair competitive advantage (Preeg, n.d.). Obviously with a single global currency, currency manipulation by individual countries would be impossible. Moreover there will be no need of such k inds of unfair methods. It is easy to perceive that problems of contemporary monetary system are currency rate fluctuations. As most of the currencies are free and are not fixed to any value, there is a huge possibility for currency speculations. For instance, speculative opportunities of FOREX market may have a great impact on economics of countries and their financial situation. The speculative attack on the Swedish Krona in 1992 is a perfect example. The Central Bank of Sweden had to raise the interest rate of its currency which caused devaluation of the Krona. Receiving income from currency speculations is getting money out of nothing. The next benefit from implementing a single global currency will be the elimination of currency speculations existence. The single global currency will present a different choice for speculators: if they wish to speculate, they will need to choose another commodity, as the money of the people will no longer be for sale (Bonpasse, 2006). Another problem of todays financial system is international reserves or foreign exchange reserves. As the possibility of a currency crash is high, due to currency risks and currency speculations, every country holds assets in various foreign currencies, which are considered as reserve currencies. Mainly it is the US dollar, not so often it is the Euro or the UK pound. However after implementing the single global currency, this hedging method will be unnecessary. As the central bank will abandon the foreign exchange reserves, it will save a considerable amount of money. In 1992 the European Commission estimated that the future Eurozone members might be able to reduce their total international reserves by one-half or $200 billion (Bonapasse, 2008). Disadvantages of a Single Global Currency Turning to disadvantages of a Global Currency, the most negative side of it is that countries will lose the ability to control their financial policy. Today every country is able to determine their monetary policy independently. In order to have an influence on the economy, nowadays central banks of every country through influencing exchange rates and adjusting interest rates, may increase or decrease economic activity. However in case of a single global currency, changes in a local countrys finances, will demand changes in the global scale. So with the Global Currency countries will lose flexibility in their monetary policy. A uniform policy template to provide macroeconomic stability, will constrain a countrys ability to make independent interest rates and exchange rate policy (Bonpasse, as cited in Wenzel, 2007, p17). Another significant disadvantage of having a Global Currency is connected with the difference in economies of different countries. While there are only a few developed states with strong economies, the rest of the countries of the world have rather weak economies, for instance the majority of African countries or some South American countries. In the world with a common currency, the weak economies shall pull down the rest, more well off countries. If one of the members will face a crisis, the others will have to spend their resources in order to stabilize the situation. A perfect example could be the debt crisis, which recently has occurred in Greece. While the EU/IMF bailout package wasnt enough, Germany had to loan about 110 billion Euros in order to save the country from bankruptcy. In addition the crisis had a chance to spread to other countries, as it reduced confidence in the economies of other EU members. Conclusion: Is The Single Global Currency Implementable? Global Currency as a financial system has been first mentioned back in the end of XIX century. The reasons why this system still has not been implemented are rather social and political, than economical. The first obstacle is national identity. Most of the nations consider their currencies as a national symbol, equal to the flag and the anthem. Obviously people will hardly discard their own national symbol, their source of pride. Some people are tempted to view such symbols as they do their flags and national constitutional documents, and the loss of such symbols can be considered as a national loss (Bonpasse, 2008). Just imagine how hard it will be for Americans to abandon dollar and accept a currency with absolutely neutral name and with neutral images and signs. In case of a Global Currency it should be absolutely neutral, as Euro is. Political barriers also should be taken in to account. In the conditions where political tensions between two countries are possible, implementing a single currency is a huge problem. For instance, it is difficult to imagine how USA, Democratic Peoples Republic of Korea and Iran, countries which have experienced significant political tensions, would negotiate in order to accept a single currency. Or it is difficult to say how it is going to work between countries which are in state of war like North and South Korea. In addition, due to political discords, such issues as supply and printing of the Global Currency would be problematic. As an independent central bank is demanded, the first dispute within the countries would be about the location of the central bank. Every member of the global monetary union would try to pull the blanket over. It is hard to believe that after gaining membership to the global monetary union, countries would not start attempting to gain greater influence o n the central bank and hence the monetary policy. Though the process of globalization seems to be unstoppable, we are still far away from being even close to a Global Currency. In my point of view, implementation of the single global currency can be compared to the legends about Eldorado or dreams of Utopia. There is no doubt that Global Currency has more benefits than costs. The loss of control of the monetary policy is a really low price for the other advantages of this idea. Throughout the history mankind tried to give birth to a global government. League of Nations and UN could serve as examples. Esperanto as a worldwide language also has been a great proposal, which could simplify the understanding between nations. But both concepts were not successful up to this time. Unfortunately the single global currency is an idea of such type. Although globalization and the Internet did bring people around the world closer to each other, maybe we are still to different to buy food with the same money. Maybe social and cultural difference s play much bigger role in our life, than we think. USSR made an effort of erasing these differences, but where is the USSR now?