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Part - I
Introduction: Need for a Common Currency
Various factors come together to encourage the adoption of common currencies including the increased number of countries in the world and the trend toward globalization. In an increasingly globalizing world, there is likely to be a greater synchronization of business cycles. Hence, the benefits of having fewer currencies to conduct cross-border business, especially at the regional level, are likely to increase. Also, a common currency can lead to a reduction of currency volatility, which could encourage greater investment.
One of the biggest beneficiaries of a common currency is international trade*. Substitution of several national currencies by a single currency eliminates exchange rate volatility and reduces the transaction costs of trade within the group of countries. Although a common currency can create trade, it may also divert trade away from low-cost outside the group producers to less efficient 'common-currency' nations. Closer international trade between countries has been associated with more synchronized business cycles, which will reduce the incidence of asymmetric shocks. Benefits are enumerated below: -
There is a possibility of increased allocative efficiency, which is achieved through: -
Production integration
Cross border trade
Investment flows
Free trade of goods and services and free mobility of capital and labor leads to common prices across the monetary union ultimately leading to optimal allocation of resources thereby increasing welfare and economic growth. Reduction of transaction costs of trade within the group of countries. Savings would be made by avoidance of transaction costs from exchanging currencies: -
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* 'One Money, One Market: Estimating the Effect of Common Currencies on Trade' by Andrew K Rose (University of California, Berkeley, and CEPR).
* Contributed by -
Harshdeep Jolly, Anshul Mittal & Pankaj Jain,
PGP 2,
IIM Bangalore.
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