Globalisation Demands a Single Currency - Coursework Example

Globalisation Demands A Single Currency” Table of Contents Executive Summary……………………………………………………………………….3 Introduction and Overview……………………………………………………………4 2. Analysis of the Problem……………………………………………………………….4 3. Idea of One Currency for Every Country……………………………………………..6 3.1 Overview of Different Theories from Different Scholars…………………………7 3.2 Application of Different Theories from Different Scholars………………………8 4. Effect of One Currency on the Global Economy……………………………………...9 4.1 Negative Side Effects (Disadvantages)…………………………………………..13 4.2 Positive Side Effects (Advantages)………………………………………………14 5. A Possible Solution…………………………………………………………………..15 6. Conclusion …………………………………………………………………………..20 Executive Summary Globalisation is emerging and spreading at the moment and answer to the challenges posed by globalisation is the accruing tendency of regionalisation. Single currency represents the intricate phenomenon and a tendency of the search of an adequate and stable form of world money system. The analysis of problems of currency integration pays special attention to functioning of the EMU. Creation and introduction of economic circulation of the new uniform collective currency, and expansion of a field of activity of any already functioning national currency are the two basic tendencies that define the ways of development of the given form of world money. Different theories are presented by different scholars and researchers about the single currency. Some of which support the issue and some do not. Japan, Russia, Malaysia, Brazil and Argentina are the major countries that will gain positive or negative side effects of the single currency. A major negative side effect of the single currency will be faced by the dollar, whose value will decrease resulting in other disadvantages. Whereas, the transnational corporations will gain a more strong position. The extent that the capital flows we have observed from Europe to the United States are a critical piece of the story. A possible solution may be a truly globalised world economy will certainly need a global currency. In case a single currency can keep stability of prices, then it can favourably affect the potential of economic growth but the instability of dollar poses a challenge. Introduction and Overview The process of globalisation emerging and spreading at the moment put a completely different dimension of problems before the states, the decision to which is impossible for most of the countries. An adequate answer to the challenges posed by globalisation is the accruing tendency of regionalisation which is a component of globalisation phenomena but it also acts as the factor restraining negative external influence. One of the basic phenomena within the limits of expansion of the processes of regionalisation acts expansion of a level of cooperation of states in currency sphere. This includes the means of creation of a uniform currency in various integration groupings. A single currency represents the intricate phenomenon and a tendency of the search of an adequate and stable form of world money system by the concerned group of subjects of the international economic relations. We can notice that in Middle Ages, the facts confirming the existence of a given direction of currency cooperation. However, the actions on the introduction and development of uniform currencies particularly became more active from the moment of breakdown of Bretton Woods currency system. According to the Bretton Woods system, a fixed rate system was tied to most currencies together during the post-war period until 1971. This is the Bretton Woods System. After fifteen years of flexible exchange rates, many observers look back longingly at the period of the post-war (Feldstein, 1988: 110). 1. Analysis of the Problem At the analysis of problems of currency integration certainly the special attention should be paid to functioning of the Economic and Monetary Union (EMU). The reasons of introduction of Euro can be divided on two groups: internal aspect and the external character. 1. The internal aspect of the given problem first of all in aspiration to accelerate economic growth of members of the currency union, on the basis of creation of uniform economic and currency space, which uniformity will allow to give an additional impulse to qualitative development of economy of region. 2. The basic external incentive motive of the European financial integration is a competitive struggle for the leading parts in economic. The European countries even those, which before the World War II played a key role in economic and the politician, now do not possess sufficient influence on world processes if operate alone. The EMU creates preconditions of consolidation of positions of EU on international scene according to its value in global economy. EMU has united 13 states unequal in the social and economic development. In this connection more and more steadfast attention is paid to EMU macroeconomic policy. The phenomenon of single currency is characterized by two basic propensities that define the ways of development of the given form of world money. The first tendency consists in creation and introduction of economic circulation of the new uniform collective currency, accompanied by process of loss by national currencies of a part or all set of functions of money. A vivid example of realization of the given direction of development of collective currency is the processes connected with the appearance of uniform European currency – Euro. When more than eight years ago Euro was issued, everybody spoke about its future international role with great hope and expectations. Some people even argued that one day Euro can even replace U.S. Dollar as the most important international currency. There is no doubt that technically the putting Euro in circulation has had full success. Euro has been quickly and strongly affirmed as the second most important international currency of the world. At the present time, Euro by its value, much more surpasses not only European currencies, which it has replaced, but also pound sterling and Japanese Yen, the other basic international currencies. In spite of the fact that the European Central Bank does not try to expand actively application of Euro abroad, its role continues to grow. The second and a contradictory one, propensity is connected with expansion of a field of activity of any already functioning national currency, which carries out all functions of money on a global scale, or at least aspires to take similar position. An example of the given tendency is the phenomenon of official and informal conversion to dollar of some national economies. 2. Idea of One Currency for every Country The topic structure of the research of problems of uniform currencies amplifies in connection with the increasing activity of the processes directed on closer cooperation in currency sphere. There are the new integration groupings, which set oneself among other the purpose of creation of the currency union. Moreover in the qualitative plan vary already functioning currency zones. Realization of the project of the economic and currency union in the Europe represents the unique phenomenon and is a certain standard of development of currency cooperation for other integration groupings. The intention to introduce into practice the uniform currency was declared at once by some significant integration groupings, which already now take a number of actions directed on realization of their intentions. About thirty years ago nobody could even dream of uniform European currency. But today it is the reality, which has changed the world currency system in which long time dominated the American dollar. And already there is nothing surprising, that large financiers and the high-ranking officials of the different countries seriously discuss the idea of single universal currency. 3.1 Overview of Different Theories from Different Scholars Research of problems of single currency is included into a circle of interests of many scientists. The beginning of serious studying of the nature and motive forces of a phenomenon of one currency was initiated by John Maynard Keynes, who within the limits of the theory suggested creating after the World War II international collective currency "bancor" for use as the basis for the international monetary system. In spite of the fact that the plan offered by Keynes, has not been realized, works within the limits of his theory have been continued by a number of economists among which R. Triffin and other are included. The well-known economist and theorist Friedrich A. Hayek has stated his own vision of a problem of one currency in the form of the theory of competitive currencies, where he suggests to refuse the state monopoly for issue of money and to pass to competitive issue of currencies on a private basis. Now the most part of researches in the given direction is spent within the limits of the theory of optimum currency areas, whose founder is American economist R. Mundell. Mundell and his supporters prove the necessity of introduction of a single currency as care of developing countries. In their opinion flexible rates of exchange (in the recent past a standard medicine in recipes of IMF) should be considered not as strategy, but as absence of strategy. At the fixed rates the Central Bank of a small state builds the monetary policy according to an exchange rate of larger neighbour. It is a real strategy. And the flexible rate simply deprives the country of an anchor, and it should search for other point of support. Traditionally it was the price of gold, and now it is often a certain measure of internal inflation. Mundell has developed the plan of converting up to 2040 of all currencies in uniform monetary unit, which will presumably be called "DEY" (from dollar-Euro-yen). The Nobel winner has already presented this plan in IMF. Mundells works have influenced a lot of researches, devoted to studying of a problem of introduction of single currency. Among the most significant works it is possible to name works of Roderick MacKinnon, Peter B. Kenen, Arthur B. Laffer, T. Bayoumi, Willem H. Buiter, Milton Friedman, O. Han, R. Cooper, and others. 3.2 Application of Different Theories from Different Scholars The time will show whether the ideas of the researchers like Mudell will get accustomed. But it is necessary to note, that Mundells ideas were already realized twice - let us remember Raeganomics and occurrence of Euro. As a matter of fact, Mundell himself warns that changes in the international monetary system always render some powerful influence on economic; for example, destruction of Bretton Woods System was accompanied by decade of inflation, an energy crisis and wars in the Near East. Today not only Mundell is the ideologist of creation of uniform world currency. The increasing attention is paid to works of Kenneth Rogoff from Harvard. Kenneth Rogoff does not hesitate to call things by their proper names and considers that it is impossible to establish "a fair rate" between the USA, Japan and European Union. He also specifies an opportunity of manipulations with interest rates, interventions and use of not market tools at an establishment of a rate. Rogoff (1998) insists that rates of exchange postpone economic integration, and simultaneously gives a number of examples when rates reach the optimum value not for a year-two, and during a life of the whole generation. The Federal Reserve system cannot apply for a role of the central bank for uniform currency as FRC depends on the Congress of the USA. Also Rogoff concludes that the uniform currency is only foreseeable prospect, during the nearest time the world is doomed to presence of two-three or more dominating currencies. The exclusive position of US dollar caused by an exclusive role of the USA in economic during several decades, as a result has led to breakdown of Bretton Woods currency system. System inability of separate national currency to carry out the function of world money is convincingly proved by R. Triffin and is known in the economic literature as "Triffins dilemma". Triffin (1960) highlighted a potential problem with the Bretton Woods system in terms of dollar liabilities increasing faster than the gold stock. 3. Effect of One Currency on the Global Economy The modern currency system is far from being ideal. In February 1991, the Heads of Government of the Member States of the European Community signed the Treaty on European Union - the Maastricht Treaty (Barnett, 2004: 73). The Maastricht Treaty has allocated European Central Bank with greater powers and has given to it operational independence that it could support stability of the prices and till now the European Central Bank shows rather high results of the activity. "Currency wars" are won not by the one, who possesses the best set of resources for the organization of production, but the one, who has greater influence on the potential contenders. Euro, now in the currency markets, is the second on volume of operations currency after Dollar, and the most often used currency pair. This specifies that Euro represents the important leading currency in currency transactions and of trading calculations in the Europe between the countries of Euro-zone and the countries, which are not entering into Euro-zone, but it is almost not used in international trading operations outside Euro-zone. Partly it may be connected with the fact that calculations in trade of raw goods are traditionally made in Dollars. In many countries near Euro-zone it is also used alongside with national currency or instead of it that is called Euroisation. Euroisation can be achieved very easily by “declaring the Euro legal tender, like the dollar in Ecuador or Panama” (Gros & Steinherr, 2004: 316). This growing tendency is obvious to all functions of money i.e. a. means of payment (cash and credit), b. means of the savings (bank deposits) and c. a unit of payment (loan agreement). Europe is not so uniform, and the Iraq crisis has shown it. To speak about success of Euro it is possible only when the policy conducted by the European Central Bank will promote the economic growth of the main participants of the Euro-zone. The government of the USA conducts a dangerous game with dollar. The game is really dangerous if to consider that on a background of growth of Euro more and more than participants of the world currency market trust this currency, and the dollar gradually loses the credit of trust, which it earned since 1971. Thus, proposing to set a universal currency, the USA can try to solve own problems, having received the tool of limiting financial freedom of other countries. The aspirations of many countries to the integration processes are as follows: Japan: The alliance between the Europe and Japan, moreover on a background of mass exchange of reserves in Euro by the third countries, looks for the USA rather threateningly. The Japanese perfectly understand that in conditions when the country already experiences a deflation since some years, and officials openly speak about necessity of carrying out of reforms and re-structuring, it will be difficult to conduct the game independently. The Bank of Japan has put world records on the size of currency interventions, but cannot keep in any way the market dollar/yen. Investors in Tokyo believe that administration of Bush, proceeding from political reasons, began the massed operation on decrease of dollar exchange rate, which now promptly becomes cheaper in relation to yen. In Japan also, they are dissatisfied with the policy of the USA. Interest of other countries like China or Russia for Euro forces Tokyo to negotiate the processes with Brucellosis. Russia: The Russian part insists on necessity of uniform currency as final stage of formation of the incorporated economic space in territory of the Russian Federation and Belarus. Russia will thus experience positive side effects through the single currency. Brazil and Argentina: After recent devaluation of national currencies Brazil and Argentina consider an opportunity of creation of uniform money for support of mutual trade. These largest South-American countries in the joint statement have informed the public that are measured to create the organization, which will be engaged in development of the offer on integration of their monetary systems. Creation of the uniform currency similar to the accepted in Europe is supposed to take several years. Argentina has become interested with uniform currency after the rate of peso has fallen to 70 %. Brazil agrees as its national currency has lost about a quarter of its cost. Malaysia: The government of Malaysia one year ago has issues the so-called "gold dinar". It has the gold maintenance established and corrected by the central bank of the country depending on world and internal conjuncture on gold. Cross-country-rate of this currency is also defined by the central bank. Such currency will be put into introduction in the nearest years in six more Muslim countries, and by 2010 "the gold dinar" will be used in internal and external economic calculations in 12 Islamic states. It is necessary to note the existence of the other projects of regional currency integration, which are nowadays developed within the limits of Asian-Pacific economic community, the Union Latin American and Pyrenean states, Southern and East Africa, Indochina, and the Caribbean region. The finely tuned interest of the countries to regional currency integration is caused by instability of dollar. But hardly refusal of calculations in dollars will come fast. Most likely, we become witnesses of smooth reduction in demand for this currency. But if regional integration associations will make some agreement without the USA, the dollar will lose simultaneously function of reserve and settlement currency and the world can really receive uniform global currency or any similar tool. 4.3 Negative Side Effects The negative side effects or the disadvantages of a single currency are that practical men are not inclined to think on high matters and to idealize any currency system. They as a rule, lobby the certain interests. So, their actions are rational, predicted and explainable. Transnational corporations and large financial holdings constantly collide with huge currency risks, which should be operated. Forecasting inside of the most transnational corporation has substantially become complicated. All this are enormous costs, which fall on shoulders of shareholders and investors. It is obvious, that occurrence of a single currency will generate the conflict of interests between transnational corporations and financial intermediaries, which have got used to earn in this market. The dollar enough for a long time is the "acting world currency" and has enormous advantage before Euro and Yen, supported in huge political potential of the USA. From this position the uniform currency, which will inevitably lead to new relations with EU and Japan is not favourable to the USA, and the last are considered as the reserves, capable to provide growth of the American economy in difficult situation. It is time for dollar to accept the official status of uniform world currency for which it applies many years. 4.4 Positive Side Effects The basic advantage or positive side effect of a single currency is that the creation of collective currencies allows overcoming a situation when in the world currency market the one currency has complete domination. At present, all the central banks are involved in fascinating game and the primary goal is to stimulate the development of domestic economy at the expense of others. The countries are not interested in increase of rate of national currencies. In struggle for commodity markets they try to lower exchange rates against each other. By means of such manipulations it is possible to achieve that conditions favourable basically for the manufacture of the export goods in practice can become unprofitable. Transnational corporations and large financial holdings constantly collide with huge currency risks and the forecasting inside of the most transnational corporation has significantly become complicated. These enormous costs fall on shoulders of shareholders and investors. But the same costs are also incomes for the speculators working in the currency markets, which are taking risks upon themselves. For these people single currency has a positive side effect. However with the growth of globalisation and concentration of capitals transnational corporations win more and more strong positions, and sometimes intermediaries themselves act in a role of propagandists of one currency. In the company of supporters of uniform currency is also the present Federal Reserve Chairman Alan Greenspan, which has declared four more years back that it can be only two kinds of systems, at which currency reserves are not necessary, the first one is having uniform currency, the second one is functioning incorrectly. According to Greenspan, "We are left with the question of how the international role of the Euro will unfold. The attraction of investing in dollar-denominated assets depends upon relative rates of return. To the extent that the capital flows we have observed from Europe to the United States are a critical piece of the story, the future will be determined, at least in part, by the success in Europe of matching the expected rates of return on U.S. assets. But market pressures toward portfolio diversification are clearly also going to play a major role in the future relative positions of the dollar and the Euro. The world can only benefit from the competition" (Greenspan, 2001). Reducing the price of the dollar, Bushs administration as they believe in Japan, hopes to reduce deficiency of public finances. However in 1980th years when the dollar exchange rate was low, Near-Eastern exporters delivered oil to Asia with calculations in the Japanese yens. In case of transition of Russia to use of Euro in calculations for oil, it will promote the further growth of rate of the European currency in the world market. If the Russian export will be nominated in Euro, it will create additional demand for the European currency. 4. A Possible Solution Thus, collective currencies reflect the tendency of formation of uniform currency on the basis of creation of new monetary unit, which leans on economic potential of members of an integration grouping in rather equal degree. Collective currencies are an optimum way of formation of uniform currency in conditions of approximate equivalence of partners on the size and efficiency of economics. Collective currencies represent the fact of achievement of the certain consensus in occasion of the further development of economy and a society of integrated group of states. Creation of collective currency itself signals about the presence of overall aims and ways of their achievement. Unlike the process of official dollarisation where domination of the country, whose currency is used as uniform, a priority allows to push favourable, first of all to this state, decisions. In considered group the situation of relative balance of forces compels its members to acceptance of more conciliatory decisions. Half a century ago, Keynes suggested creating the International Monetary Fund. Then it seemed unreal, and today the International Monetary Fund works. So, why it is impossible to consider the idea of uniform universal currency viable? One of the first to answer the question was Paul Volcker, the former Federal Reserve Chairman and Under-secretary of the US Treasury. Volcker stated that “a truly globalised world economy did indeed need a global currency. In case a single currency can keep stability of prices, then it can favourably affect the potential of economic growth” (Grubel, 2003: 20-21). Since now there are still many problems, which expect uniform world currency in case of its introduction. We should understand that strengthening of Euro is the only time phenomenon caused by egoism of the USA and independence of monetarists in the European Central Bank. After successful introduction in the issue and growth of Euro in relation to dollar everyone, who earlier supported the idea of universal currency, have started talking about an opportunity of its practical realization. Really, if Europeans have created uniform central bank, if they managed to convince of necessity of introduction of single currency let not all the national governments, but the majority, why it is impossible to consider an opportunity of the similar agreement between the USA, Europe and Japan? Technically creation of such association is not too complex, but this question has political painting with economic underlying reason. The presence of uniform currency assumes also realization of a uniform monetary and credit policy which carries out the European central bank. Levers of financial policy are in hands of the national governments and are unique means of fine tuning of economy to an economic conjuncture in view of national specificity. But the matter is that opportunities of the countries-members of EMU on manipulation by the national finance are limited by necessity to support stability of Euro. The special place at the analysis of single currencies is necessary to give to the Special Drawing Right (SDR), as to collective currency of global scale. SDR was created in the end of 1960s with a view of increasing the international liquidity which is based practically exclusively on US dollar, adhered in turn to gold. However cardinal change of situation in the world markets has led to undermining of role of SDR in world currency relations owing to which now the role SDR is now insignificant. Collective currencies are a logic output from the given inconvenient position. And it is not strange that projects on formation of collective currencies have started to be developed during decline of Bretton Woods Currency System. Thus, processes of formation of collective currencies represent itself as the mechanism of development of economic polycentricity of international economics. Absolutely opposite direction of formation of uniform currency is process of official dollarisation, which is understood as legal performance by a foreign currency of functions of money in a national economy. If the collective currency is created for protection of regional economy against destructive influence of global processes, dollarisation may be considered as a consequence of expansion of process of globalisation, as a result of which the uniform world market mediated by uniform global currency is formed. Creation of a single currency on the basis of existing national currency can be characterized as result of natural selection among national currencies. The selection of the currencies, which have begun within the limits of borders of the modern national state, now develops to a level of world currency system and has poured out in a competition of currencies of the various states, both on world, and in the national markets. The given tendency reflects the concept of competitive money offered by Hayek, but not as private institutes, but representatives of national states. Use of anothers national currency as means of carrying out all or a part of functions of money for territories of the sovereign state means that own currency of this state carries out functions of money insufficiently effectively. The world practice shows that usually the given way of introduction of one currency to monetary circulation is used when partners considerably differ on economic potential. Weaker partner accepts a currency of more powerful ally as an own monetary unit. The given practice in scientific circles has received the name of full or official dollarisation. The countries, where dollarisation takes place, making a decision on carrying out of official dollarisation, proceed first of all from aspiration to provide stability of internal monetary circulation, with which the local currency cannot provide because of discredit of authority of body issuing it. The countries where the foreign currency is officially used, as a rule, are small on economic potential and are characterized by rather low level of economic development. Now official dollarisation has strongly pronounced unilateral character. The countries accepting anothers monetary unit as internal, lose the major tool of regulation of economy - an independent monetary and credit policy. The given circumstance bears in itself potentially more serious consequences, than in conditions of currency integration with collective currency where each partner has an opportunity to influence on made decisions. The country of dollarisation practically cannot render influence on the emitter of a foreign currency. Financial establishments in country with dollarisation have no access to monetary resources of neither own central bank, which existence in similar conditions becomes deprived sense, nor foreign emitter of uniform currency. Certainly, one of the main barriers on the way to single world currency is a non-uniformity of economic development. But it is also necessary the uniform concept on the basis of which it will be possible to carry out the issue of universal currency. Though, it is quite possible that such concept is already created, and just waits the right time somewhere in Harvard, or in IMF, or even behind the walls of the Pentagon. But while it is not promulgated, the financial analysts need to think about a lot of other issues. 5. Conclusion For now there are still many problems, which expect uniform world currency in case of its introduction. We should understand that strengthening of Euro is the only time phenomenon caused by egoism of the USA and independence of monetarists in the European Central Bank. After successful introduction in the issue and growth of Euro in relation to dollar everyone, who earlier supported the idea of universal currency, have started talking about an opportunity of its practical realization. Really, if Europeans have created uniform central bank, if they managed to convince of necessity of introduction of single currency let not all the national governments, but the majority, why it is impossible to consider an opportunity of the similar agreement between the USA, Europe and Japan? Technically creation of such association is not too complex, but this question has political painting with economic underlying reason. The finely tuned interest of the countries to regional currency integration is caused by instability of dollar. Besides the European continent, collective currencies have received certain development and in other parts of the world like Latin America, whose states have created a lot of integration associations with various international monetary units is allocated. Bibliography: Barnett, H.A., 2004, Constitutional & Administrative Law, Routledge Cavendish. Dillard,D.D.(2005)The Economics of John Maynard Keynes: The Theory of a Monetary Economy. Kessinger Publishing Feldstein, M. S. (1988). International Economic Cooperation . University of Chicago Press. Greenspan, A. (2001). The Euro as an international currency. Before the Euro 50 Group Roundtable, Washington, D.C. 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