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Part - III

According to the theory of optimum currency areas of Robert Mundell, known as the "father of the euro," only after the economic models and levels in a region conform with one another to a certain degree, can a single currency and a unified currency policy contribute to all these economies.

The convergence criteria used as a test for feasibility of a common currency union are as follows: -

The Convergence Criteria and The Asian Currency Union

A single currency means one monetary policy for the countries that have adopted it. However, one monetary policy is appropriate only for a set of countries that constitute an "optimum currency area." For any set of nations to form such an area, it must meet four conditions, the way the EU did.

First, the member states should possess similar economies. They should possess compatible economic structures, produce similar types of goods and services, and share the same level of economic diversification. In this situation, the countries will face the same economic shocks at the same time and one exchange rate policy would be an advantage.

Consider the implications if this condition is not met. The more dissimilar the countries are, the higher the probability that they will face different economic shocks at different times, requiring different exchange rate policies. It would be difficult for the common currency to satisfy economic needs of both countries at the same time. The development levels and interests of the countries of Asia are very diverse for this to be possible in the near future. Vietnam and Japan have almost nothing in common in terms of economic conditions or goals, to take only one of the more extreme binary comparisons. The orientations of different economies are very different. Lets understand in what ways: -

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* Contributed by -
Harshdeep Jolly, Anshul Mittal & Pankaj Jain,
PGP 2,
IIM Bangalore.