At the beginning of World War I, this standard ceased to exist and in 1920 countries permitted greater exchange rate flexibility, which however did not last long and after the end of the World War II the Bretton Woods system has been implemented. This standard has been created as a result of numerous meetings between the World War II winning states with the final conference taking place at the Hotel in Bretton Woods, New Hampshire. The standard took the name of this last conference’s venue. In August 15, 1971 Richard Nixon in his speech announced that the price of dollar will be no longer fixed against gold. This has put an end to the Bretton Woods system and has set-off a new era in international monetary system. The main feature of this new system is that it is neither a pure gold standard nor a pure exchange rate float, but rather a system in between these two extremes. This standard exists until today and has been strongly undermined during the latest financial crisis.
The financial markets of the world have been an integrated market as the development of the globalization. However, the free movement of finance across the different nations over the same period, following financial liberalization, makes the global financial and economic market unstable because of the fluctuation of the exchange rates between different global currencies, such as the dollar, euro pound and yen. Hence, a global single currency is believed to be an effective way of alleviating the fluctuation of financial market, meanwhile increasing benefits and improving business certainty for business groups, especially financial institutions.
Economic Advantages of a Single Global Currency
The advantages of a global currency are as follows. First of all, single currency will eliminate transaction costs, which are linked to international financial operations. This will affect both: ordinary citizens who plan to spend money abroad and multinational corporations undertaking international transactions. Different currencies create a lot of inconveniences and barriers. Exchanging one currency for another always involves currency exchange fees, as banks, which provide such currency exchanges, require commissions for their services. In the scale of countries or even monetary unions such expenditures on currency exchange fees may reach high amounts. By eliminating the need for currency exchange the monetary unions may save resources. For instance, the European Commission (EC) has estimated that due to a single currency across the European Union 13 to 20 billion of Euro were saved per year. Moreover the difference between the currencies’ exchange rates becomes an obstacle for a free flow of trade. As the barrier of different currencies will disappear, the number of international transactions will increase. Neighboring countries, which are members of a common monetary union, tend to trade more frequently with each other.
Currency risks nowadays are one of the major disadvantages of the modern international financial system. Everything, ranged from a natural disaster to terroristic attack, may affect the value of the currency and as a result cause loss. Foreign investors, as well as stock holders, have to hedge their risk, which also demands additional expenditures. Implementation of the single global currency will eliminate the risk of loss, due to currency fluctuations. The adoption of a single global currency will save 400 billion of US dollars annually in foreign exchange transaction costs, which come from trading 3.8 trillion US dollars every trading day.
Currency misalignment is a process when central bank increases or decreases the value of its currency against another for different purposes. The most known cases of currency manipulation are the cases of China and Japan. Both countries artificially undervalued their currencies, which made their exports more competitive. As the value of Yen and Yuan decreases, the prices on Japanese and Chinese products will consequently fall. This has created a great advantage for Japanese and Chinese products in the market. Today the low value of these currencies, which has nothing to do with the real situation, has created huge difficulties for the economies of Europe and USA. Japan and China, based on all criteria related to the IMF definition, have been persistently manipulating their currencies to gain an unfair competitive advantage. Obviously with a single global currency, currency manipulation by individual countries would be impossible. Moreover there will be no need of such kinds of “unfair” methods.
It is easy to perceive that problems of contemporary monetary system are currency rate fluctuations. As most of the currencies are “free” and are not fixed to any value, there is a huge possibility for currency speculations. For instance, speculative opportunities of FOREX market may have a great impact on economics of countries and their financial situation. The speculative attack on the Swedish Krona in 1992 is a perfect example. The Central Bank of Sweden had to raise the interest rate of its currency which caused devaluation of the Krona. Receiving income from currency speculations is getting money out of nothing. The next benefit from implementing a single global currency will be the elimination of currency speculation’s existence. The single global currency will present a different choice for speculators: if they wish to speculate, they will need to choose another commodity, as the money of the people will no longer be for sale.
Another problem of today’s financial system is international reserves or foreign exchange reserves. As the possibility of a currency crash is high, due to currency risks and currency speculations, every country holds assets in various foreign currencies, which are considered as reserve currencies. Mainly it is the US dollar, not so often it is the Euro or the UK pound. However after implementing the single global currency, this hedging method will be unnecessary. As the central bank will abandon the foreign exchange reserves, it will save a considerable amount of money.
Disadvantages of a Single Global Currency
Turning to disadvantages of a Global Currency, the most negative side of it is that countries will lose the ability to control their financial policy. Today every country is able to determine their monetary policy independently. In order to have an influence on the economy, nowadays central banks of every country through influencing exchange rates and adjusting interest rates, may increase or decrease economic activity. However in case of a single global currency, changes in a local country’s finances, will demand changes in the global scale. So with the Global Currency countries will lose flexibility in their monetary policy. A uniform policy template to provide macroeconomic stability, will constrain a country’s ability to make independent interest rates and exchange rate policy.
Another significant disadvantage of having a Global Currency is connected with the difference in economies of different countries. While there are only a few developed states with strong economies, the rest of the countries of the world have rather weak economies, for instance the majority of African countries or some South American countries. In the world with a common currency, the weak economies shall pull down the rest, more well off countries. If one of the members will face a crisis, the others will have to spend their resources in order to stabilize the situation. A perfect example could be the debt crisis, which recently has occurred in Greece. While the EU/IMF bailout package wasn’t enough, Germany had to loan about 110 billion Euros in order to save the country from bankruptcy. In addition the crisis had a chance to spread to other countries, as it reduced confidence in the economies of other EU members.