Readers Question: Should The World Adopt A Unified Currency?
I haven’t given it much thought; given the great difficulties of the Euro single currency within parts of the European Union, the idea of extending this to include even more disparate countries seems a non-starter.
From a philosophic point of view, I think the world is heading towards greater integration, and perhaps in a thousands of years we will global governments, global fiscal transfers and we could move towards a global single currency. But, this would require a completely different mindset of selflessness, breaking down parochial self-interest and seeing the world as one world-family.
Alas, I can’t see this spiritual evolution happening quickly. Some issues to consider in a single currency.
What happens when countries have different inflation rates, but the same currency? In Europe, countries with higher inflation rates (e.g. Greece, Spain, Portugal) were left with large current account deficits, lower exports and lower growth. A global currency, would see even bigger disparities in relative costs and competitiveness.
Single monetary policy. For a single currency to be practical, the assumption would be that you need a single monetary policy. That would be highly impractical and could be devastating for some economies who have different rates of economic growth. For example, we might have very low interest rates, but countries with fast rates of growth could see inflation. It might be more practical to have a single currency, but have regional variations in interest rates. I’m not quite sure how this would work or what the consequences would be. But, with a single global currency you would see a lot of capital flows from less prosperous countries – especially with any variation in interest rate.
Who would issue the currency? The ECB is responsible for issuing currency within the Eurozone. Who would be responsible for issue the whole currency of the world? and how would they decide how much to print. Also, would it mean countries no longer have a lender of last resort? In the Eurozone, countries without a lender of last resort – Ireland, Italy, Greece, Portugal saw periods of rapidly rising interest rates due to liquidity fears. To some extent the ECB has contained them, but it would become much harder with a global currency.
Fiscal policy. A big problem of the Euro has been the lack of a unified approach to fiscal policy. Some argue that a single currency can only be effective with co-ordinated fiscal policy. Trying to manage fiscal policy on a global scale would be a daunting prospect to say the least.
The idea of global economic co-operation and seeing ourselves as one global economy definitely has merit. But, the experience of the Euro is that far from bring countries together, the Euro single currency has created painful divisions as countries are forced into periods of deflation, recession and austerity. The consequence has been to promote political extremism and disputes between countries. To try and repeat the experiment on a global scale would be brave to say the least.
photo Flickr Espos CC