The Problem with a Common Currency

The current Greece crisis brought to light a lot of things but the important one was the advantage of being part of a shared currency zone. Before joining the euro zone, Greece was classified as an emerging economy and considered a credit risk. But once it joined the Eurozone, investors began lending to Greece at lower rates with the assumption that if absolutely needed, other members like Germany will take a bullet for Greece and bail it out. Going by this assumption Greece was flooded with money being lent at low rates. Even though this did not work out well for Greece, who started borrowing huge sums of money and eventually couldn’t payback its debts back, it brings out the point that I am trying to make when there is system of common currency in place . Asia one of the fastest growing economies in the world is also among the most interlinked regions with more than half the countries trading among themselves. Asian countries therefore are becoming large sources of investments for themselves. A common currency among these countries could help in the trade and investment activities.

Having a common currency will reduce the dependence on a common currency, like the dollar, on the basis of which transactions are made which will eventually increase the value of the dollar and the transaction costs for the trades. Thus a single currency helps to eliminate the risks associated with volatility in exchange rates and improves business confidence in exports thereby leading to economic growth.

A common currency can protect the interests of the less developed countries among the members, Moreover, it can further improve the economies of the developed countries. Having a common currency also leads to price transparency and therefore the consumers are able to compare the prices of goods that are offered by various countries.

Although the pros for a single currency are there, it has a lot of disadvantages too. First and the most important one being the loss of autonomy over the monetary policy of a country. Member countries loose the option of using devaluation, tax cuts and borrowing from others to boost their economy. In short, if China had been part of a common Asian currency it could not have devalued its currency to stabilize the economy and had Greece not been part of the Eurozone it could have stabilized its economy without depending on others. 

The next issue is that if there is common currency you are practically putting a developed country like Japan in the same bracket as a developing country like Cambodia, Bhutan or Afghanistan which makes it difficult to set a interest rate that is acceptable for both developed and developing countries.
Lastly the countries are in different stages of their business cycle and thus a common inflation rate cannot be set for all the countries as a whole.

So as long as things are peachy, a common currency seems like a good idea but problems in one of the member countries can make the cons look greater than the pros like in the case of the Greece.

- Sarath Chandar
chandarsarath91@gmail.com