• The Invisible Hand

Would a global currency be desirable?

Updated: Feb 4, 2019

This blog explores the concept of a global currency and whether it could improve the global economy.

Just like languages, a currency seems to be an unnecessary barrier to international integration, a remnant from a bygone age. So is it time to scrap currencies and create a universal global currency? Surely that would be more convenient.

However, there are several important economic reasons for different currencies which means a scaled up currency would almost certainly be disastrous. For example the euro, which merged 19 separate currencies into one, has triggered a Euro debt crisis and sent the Greek economy into crisis. (For more on the euro read here https://www.economics-exchange.com/home/the-ticking-euro-time-bomb).The main problem with large currency unions is that they require an executive monetary authority. In the case of a global currency, there would have to be a world central bank. This means the same monetary policy is used through the world. Therefore, monetary policy will not respond to economic problems in small countries. Depressions will go without intervention and booms will become uncontrollable.

Like the Eurozone, countries would still maintain separate fiscal policy. Therefore, low income, riskier countries would have access to much cheaper credit because they would gain the credit rating of the strongest economy in the currency zone. This would encourage excessive borrowing and a debt bubble. Ideally, there would be an optimum zone where there are fiscal transfers across borders, just as New York is a net contributor of money to other states. However, there is not enough trust or cultural acceptability for this yet, so the world will remain very much a sub-optimal currency union. On the other hand, lower interest rates could reduce debt in developing countries and allow them to fund development.

A global currency is not a completely ridiculous idea among economists and even Keynes has argued it may have some benefits. He stated that it would not suffer from inflation and it would make international business more efficient. There would be no risk of currency problems and therefore companies would be much more confident about making FDI. For consumers and businesses there is a removal in transaction costs which would bring a significant increase in world trade. Controlling for other factors Micco, Stein and Ordonez (2003) found since the euro was introduced there had been no trade diversion and it was estimated that trade between EU members increased between 5-10%. Such an increase in world trade could bring unrivalled prosperity to nations. Perhaps once trade barriers have been removed the next step is currency barriers.

However, the problem remains that while the world economy is massively diverse a single currency will fail to serve all of those economies well. Trying to use the same monetary policy in the US and in Tanzania will inevitably be disastrous to those economies. Although trade is an important driver of economic growth, monetary policy is too powerful as a tool to be sacrificed.

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