SINGLE CURRENCY SYSTEM

There has recently been some suggestion of the need for a SINGLE CURRENCY SYSTEM, and the discussion that ensued seemed to show certain difficulties in coming to grips with the question. That was probably because the first essential of any currency, if it be not of full value, i.e. gold, silver or some other desired commodity, is trust. That trust in the value of the circulating currency must be felt by users in the issuing authority, be it a bank, a government, or even a private concern.The point about all these rather elementary facts for the world at large is that no SINGLE CURRENCY SYSTEM could function unless and until an issuing authority - international bank or other institution - had the confidence throughout the world that its currency would be sound. In the present circumstances, it is not likely that any institution merely underwritten by the United Nations would secure that confidence.

Benefits to Single Currency

Cost of exchange currency:

The most obvious benefit of adopting a single currency is to remove the cost of exchanging currency, theoretically allowing businesses and individuals to consummate previously unprofitable trades. For consumers, banks must charge the same for intra-member cross-border transactions as purely domestic transactions for electronic payments

Removes exchange rate risk:

The absence of distinct currencies also removes exchange rate risks. The risk of unanticipated exchange rate movement has always added an additional risk or uncertainty for companies or individuals that invest or trade outside their own currency zones. Companies that hedges against this risk will no longer need to shoulder this additional cost. This is particularly important for countries whose currencies had traditionally fluctuated a great deal.

Financial markets get more liquid:

Financial markets on the continent are expected to be far more liquid and flexible than they were in the past. The reduction in cross-border transaction costs will allow larger banking firms to provide a wider array of banking services that can compete across and beyond the world.

Price parity:

Another effect of the common European currency is that differences in prices—in particular in price levels—should decrease because of the “law of one price”. Differences in prices can trigger arbitrage i.e. speculators trade in a commodity across borders purely to exploit the price differential. Therefore, prices on commonly traded goods are likely to converge, causing inflation in some regions and deflation in others during the transition. Some evidence of this has been observed in specific markets.

Macroeconomic stability:

Low levels of inflation are the hallmark of stable and modern economies. Because a high level of inflation acts as a tax seignior age and theoretically discourages investment, it is generally viewed as SINGLE CURRENCY SYSTEM undesirable. In spite of the downside, many countries have been unable or unwilling to deal with serious inflationary pressures. Some countries have successfully contained them by establishing largely independent central banks.

Factors Favoring Currency Consolidation

An End to Transaction Costs:

Everyday, roughly 1.4 trillion dollars are traded via the foreign exchange market. Buried within every transaction are fees and costs that amount to roughly .33% of the total amount exchanged. Although seemingly an insignificant number, when considering the vast volume traded in the foreign exchange markets it amounts to approximately 1 trillion dollars a year! The creation of a single currency would virtually eliminate all of these costs and allow a free flow of money. The money saved from the elimination of transaction costs could be put into positive global needs, such as feeding the hungry or funding research to cure diseases.

Troubled Currencies:

With the rapid evolution of the global marketplace over the last several decades and the immense need for international trade, nations must not

only be confident in the strength of their own currency, but also in the strength of their trading partners’ currencies. Economists speculate that a

currency crisis in one nation has the potential to spread fear amongst its trading partners, which could eventually lead to a currency epidemic. The recent and disastrous currency crises in Thailand, Mexico, Argentina and Russia have proven this to be true. The introduction of a universal currency would eliminate the possibility of such a potentially catastrophic situation.

Countries in Debt:

In the modern SINGLE CURRENCY SYSTEM, it is very common for one country to borrow funds from another nation. As a result of the volatility in exchange rates, many creditor nations are concerned with the possibility of depreciation in the value of their loans due to a currency devaluation or crisis. For example, the United States and Japan have the highest national debts in the world and if their currencies were to depreciate in value then their debt would be worth less. While this would be beneficial to debtor nations, their creditors would essentially be losing money. A SINGLE CURRENCY SYSTEM system without exchange rate volatility would ease the fears of creditor nations and might even encourage more lending between nations.

Factors Opposing Currency Consolidation

One Currency = One Monetary Policy:

Implicit in the introduction of a universal currency is the creation of a central authority to control its monetary policy. The problem of having one monetary policy affect many different countries is that at any given

time some economies will be at different points in the natural business cycles then others. For instance, one country's economy might be

overheating and in desperate need of a tightening cycle in interest rates, while at the same time a different country on the other side of the world could be suffering through a terrible recession that would need a reduction in interest rates to stimulate the economy. Therefore, decision making at the central authority will be very difficult as it tries to balance the world economy as a whole at the expense of individual nations. Although this issue continues to plague the European Union, it would be a necessary sacrifice in order for the system to function properly and one that not many nations would be willing to make. In addition, nations often utilize the exchange rate system as a "shock absorber" in times of economic trouble and instability. For example, a nation with a large deficit may adopt a soft monetary policy causing their currency to depreciate in value with the purpose being to increase the country's exports and domestic spending. Similarly, many countries fix their exchange rates in order to boost their exports. China pegged the Yuan to the United Sates dollar which allowed their goods to remain the cheapest in the marketplace and gave them a competitive advantage. If a single currency system were adopted, then the ability to use exchange rates as a "shock absorber" or as a business tactic would be lost, potentially damaging exporting nations.

SINGLE CURRENCY SYSTEM Nationalism:

Nationalism is a very powerful emotion and one vehicle in which it manifests itself is a country's currency. Money is a major part of daily life and it often features illustrations of national heroes or leaders, causing individuals to feel that their currency represents their nation's individuality and sovereignty. Additionally, forcing a universal currency upon individual countries may anger many patriotic citizens. As a result, many governments might oppose the adoption of a SINGLE CURRENCY SYSTEM

due to the undesired consequence of a decline in individual identity. In fact, the loss of individual identity was one of the key reasons that the United Kingdom declined to accept the Euro as their currency.

Governance:

The creation of a SINGLE CURRENCY SYSTEM will require the creation of a universal central bank to manage it. The bank will control the world's interest rates and therefore, its leaders will have considerable influence over individual economies. The process of selecting bank officials and figuring out an appropriate amount of representation for each country will surely be sore points of contention. Also, in order for the bank to function properly, it must be a fully independent institution. If one country or even one continent were to have undue influence on the bank's decisions then it will surely fail. One of the reasons for the Euro's success has been the European Central Bank's (ECB) deft handling of its monetary policy and the ECB's management of the Euro zone economy. The bank's independence and strong leadership have ensured that for the most part the difficult, but correct decisions have been made.

Economic crises of Pakistan

The SINGLE CURRENCY SYSTEM crisis is close to knocking out its most important and potentially most dangerous victim yet: Pakistan needs a financial support package of $10 billion to $15 billion to avoid collapse. Precisely because major governments around the world feel under pressure, however, Pakistan is currently struggling to get a financial support package and SINGLE CURRENCY SYSTEM put together. Pakistani officials are meeting International Monetary Fund representatives. Overall the Pakistani economy is in a desperate state, and the causes are long term, structural and not at all conducive to any "quick fix": The new Zardari government in Islamabad has inherited high inflation, large income inequality and a chronic lack of spending for infrastructure and education.

Pakistan's leaders are also understandably reluctant to put their political future and their country's fate in the hands of the International Monetary Fund, for they realize that IMF aid is usually tied to draconian conditions requiring the slashing of government spending. In a country like Pakistan, that means cutting social programs to support the poor, including subsidizing food prices and SINGLE CURRENCY SYSTEM.