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Part - III

The Euro and European Monetary Union did not spring up, full-grown, from an empty field. In Asia, as well, existing institutions will almost certainly play a role in the creation of a common currency. APEC could be one key, but ASEAN would be much more appropriate as the lead body for developing the concept. Of course, it would be highly welcome if the heavyweights of the region pulled their own weight. Therefore, ASEAN+3 (Japan, China and South Korea) or, preferably ASEAN+4 (including India) would become the sounding board for this idea.

Considerations

The first thing involved in participating in a monetary union is to choose between fixed and flexible exchange rates. Either fixed or flexible exchange rate has its advantages and disadvantages, and the last one is usually regarded as an adjustable mechanism by its advocator. When an economy faces external balance of payment deficit, the depreciation of currency can substitute for the problem of unemployment. On the other hand, appreciation can substitute for inflation when external surplus exists. But, are all currencies suitable for flexible exchange rate? Or if an economy encounters external shock and results in unemployment or inflation, are there any solutions to be complete in both respects? R. Mundell has found the one.

He argued that if the flexible exchange rate wants to stabilize the economy, it must construct on the basis of single regional currency. And the single currency represents one unique and independent central bank. If the labors are able to move freely in the region, adopting monetary policy by the independent central bank will effectively solve the problems of unemployment and inflation. Consequently, it will increase the whole benefit of the region. For a long vision of human beings, if the world can be separated into several economic areas and the factors are completely mobilized among the areas, setting up a world central bank can not only harmonize the problems of unemployment and inflation but also bring more welfare for the mankind.

The major benefits of joining a monetary union are enhancing the usefulness of money, stable monetary policies, reducing the currency speculation, and saving unnecessary foreign reserve holdings. Among the four advantages, enhancing the usefulness of money is the most important. This is explained as follows:

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* Contributed by -
Vipul Mittal,
First Year, MBA (Global),
IMT, Nagpur.