One for All and All for One, Essay Example

In recent years, interest in a global currency has been motivated by Euro’s success. Euro is a common currency that is used by member countries of the European Union. It is widely anticipated that a universal currency would make it easy for people to conduct trade on a global scale.

Economists are piling up pressure on world leaders to come up with an internationally recognized currency especially with the success of Euro, a venture that many analysts had anticipated to be an embarrassing failure.

Every year, $400 billion is spent in facilitation of foreign exchange transactions according to a Foreign Exchange Transaction Cost Analysis Report prepared by Russell Investment Group in 2004. The costs are often incurred through payment for the currency exchange services offered and in the form of hedging costs. Additionally, there would no longer be foreign currency fluctuations. For this reason, there would be no reason for foreign wealth funds and central banks to keep shifting their holdings.

The most obvious benefit of a single currency is the ease with which prices of commodities can be compared regardless of the geographical location of the seller. People who keep traveling overseas would no longer have to keep converting their currency into that of the foreign currency, no to mention that they usually have to pay for this inconvenience.

According to 1999 Nobel Prize for Economics winner Robert Mundell, trade gains and real incomes would dramatically increase all over the world (658). The Columbia University economist continues to say that if the dollar was used all over the world, inflation rates would be uniform the world over (659). This would make financial integration an achievable venture.

The adoption of a universal currency would have very pivotal political and economic underpinnings. In the political sense, the most relevant question to ask would be about which country’s currency should be adopted by the rest of humanity. In economic terms, the most important thing, in the words of Mundell, is “the formation of a world currency, rather than a single currency for the entire world” (671). Within the frames of the latter conception, each country would maintain the autonomy of producing her own unit, which would always be exchanging at par with the universal unit.

The International Monetary Fund (IMF) is the organization that has been on the receiving end of unending pressure to put in place mechanisms of facilitating a smooth transition into a single world currency. This is because the organization is responsible for preventing crises and taking initiatives of solving currency crises whenever they occur.

Apart from responses and disturbances, many other factors motivate the clamor for an international currency. Mundell mentions the need for factor mobility in order for financial adjustments to be facilitated (661). McKinnon says that a universal currency would lead to openness of different national economies (720). With openness, the gains associated with reduced transnational costs are magnified, he says.

The adoption of a single world currency would have many implications in terms of policy changes. Different economists discuss these changes from different perspectives. Eichebaum and Evans are of the view that such a monetary initiative would affect relative quantities and prices (4). In this case, Romer and Romer believe that there would be need for coordination in order for all potential sources of inertia to be anticipated and dealt with (125).

In an international market where asymmetric disturbances are easy to correct, a common currency gives assurance to investors that large shocks will lead to small costs even in cases where macroeconomic variables are offset from their normal levels, says Mundell (660).

When Mundell was triggering the debate on a world currency, his main area of focus was labor mobility. He believed that labor mobility was a good adjustment mechanism that would deal with unemployment problems across transnational boundaries (661). Equilibrium would be restored through use of a single reference point in determining relative wages in different professions all over the world.

The greatest challenge would be accommodating variances in different extents to which different economies benefit from labor mobility. In countries where labor mobility is high, the benefits of an integrationist approach in the currency used would be beneficial. As trade continues to take on a global perspective, mobility of labor will increase. Therefore, economic shift towards globalization will continue to present the world with more reasons for introduction of a universal currency.

Flexibility of national fiscal instruments, according to Eichebaum and Evans (3), is the main factor that would attract national entities into willingness to relinquish their financial autonomy since they would never be deprived of the power to set their national economic priorities.

According to David Francis in a Christian Science Monitor article recently published on msn.com, a global currency would save economies from being riled by national currency crises. David goes on to point out Argentina, Thailand, Mexico and Russia as some of the countries that have suffered national currency crises in recent years.

With a global currency, investors would tread into even those countries whose currencies are classified as “risky”, writes David Francis. Additionally, values of stocks as well as other assets would continue to soar since investors would always be sure of getting real value for their portfolio. However, many people would consider it a very emotional thing for a national currency to be abandoned. This issue of human ties with a country’s symbol of economic independence could be the main reason why the idea that Mundell proposed in 1961 is yet to be put into practice almost 50 years later.

Various efforts are being done by regional economic blocs across the world to come up with a harmonized currency that is inspired by success of Euro in European Union countries. Gulf Cooperation Council is set to come up with a single currency for Kuwait, Saudi Arabia, Bahrain, Qatar, United Arab Emirates and Oman. The same case applies in the case of West African Monetary Zone where the Eco is to be launched in Sierra Leone, Nigeria, Guinea, Gambia and Ghana.

Works Cited

Eichebaum, Martin and Charles, Evans “Some Empirical Evidence On The Effects Of Monetary Policy Shocks On Exchange Rates.” National Bureau of Economic Research. Working Paper No. 4271 (1993).

McKinnon, Ronald “Optimum Currency Areas,” American Economic Review 53 (1963) p. 717-724.

Mundell, Robert “A Theory of Optimum Currency Areas.” American Economic Review 51 (1961) p. 657-664.

Romer, Christian and David. Romer “Does Monetary Policy Matter? A New Test In The Spirit Of Friedman and Schwartz.” NBER Macroeconomics Annual (1989) p. 121-170.