There is little doubt that the establishment of a common currency for Europe as well as the United States will not only result in financial advantages, but also reduce monetary expenses. In general, the basic gains for the people from any such move will definitely surpass the expenditures.
In fact, Robert Mundell was the first to elucidate on the theory regarding the advantages in different areas way back in the 1960s. The advantage of the different rates of exchange prevailing between the currencies of different nations is only one - it aids in regulating the unequal fiscal blows. A common currency helps to get rid of the facility to regulate the costs between dissimilar fiscal areas by means of alterations in the monetary exchange rates. As a result of such diverse exchange rates, changes need to be done in any of the following three methods.
Foremost, the manual labour needs to be movable. When labour is mobile, workers may travel from one place to another in times of economic slums. For instance, when there is an economic recession in a particular region, workers from that area may move to another location witnessing a booming economy. Secondly, the salaries and costs ought to be accommodating so that the economy is able to act in response to the adjustments according to the demand and supply. Thirdly, but not the least, a mechanism out to be established by means of which resources may be sent from one region to another, which is facing economic calamities, with a view to help it pull through the financial slump. If you take these three decisive factors into consideration, it would appear improbable for the United States and Europe to accommodate as per Robert Mundell's characterization of the most favourable places for having a common currency. While this is a fact, it is also true that many large countries, such as Russia, India, China or Italy, that presently have common currencies in their respective domains also do not fit into Mundell's definition of the most advantageous area for having a shared currency. Irrespective of the benefits of having a common currency, the truth remains that no government has permitted the circulation of different currencies or monies in the areas under its jurisdiction.
Nevertheless, the moot question is whether Europe and the United States would be more benefited if they introduced a common currency for both the regions or having a whole host of legal tenders or monies would prove to more effective. The truth is that whether or not Europe and the United States make any endeavour for establishing a single currency for both the regions will largely depend to the actual economic and political advantages they would be able to derive from a prospective Eurodollar.
It may be mentioned here that currency is always a public utility item. When the government of a particular country issues a single currency, it becomes easier of the people of that nation to perform their economic functions without having to bring upon themselves the burden of having to go through the exchange rates every time they do a transaction. For instance, as the United States has a single currency for all its 50 states, people in each of these states are free to carry out their financial activities with people in other states of the federation without much trouble. Like this instance, a single currency offers a number of fiscal competences than having multiple monies.
First and foremost, having common currency enhances the clearness of costs. Irrespective of the fact whether you purchase or vend merchandise in California or in New Hampshire, when you have a single currency the consumers will always be able to evaluate of the goods in the United States. On the other hand, any person living in Europe and wanting to purchase or sell any item, he or she will be required to evaluate the price of the merchandise in as many as 14 different monies.
Another benefit of having a shared currency is that is lowers the business expenditures of purchasing or selling merchandise simply owing to the fact that you don't have to convert the currency going by the prevailing exchange rates. In fact, international business houses that usually work with as many as 10 or even 20 different currencies would be most benefitted by the introduction of a single currency. In the era of a single currency, these multinational corporations would not only witness a major reduction in the expenditures relating to administration of proceeds, but also find that their expenses have dropped remarkably.
The third benefit of having a common currency is that it would help the countries sharing a currency to do away with the risk of exchange rates among them. In fact, in order to carry out their operations, the international business houses often land up spending heavily on the risks of foreign exchange as well as the expenses of circumventing these hazards. Thus, the existence of a single or common currency will enable these multinational corporations to avoid such risks involved with foreign exchange. Precisely speaking, the companies operating only within the boundaries of the United States are already experiencing these benefits.
Fourthly, setting up of a currency union will prevent the nations from using devaluation methods as a component of their respective fiscal policies to take advantage above other nations. Next, since a Central Bank is in control of the management of a currency union, no government is able to manoeuvre with it. In other words, no particular government, no matter how powerful it is, will be able to regulate the functioning or operations of a currency union. In such a situation, it would enable the Central Bank administering the currency union to concentrate on its basic activities - regulating prices as well as combating inflation (price rises).
It may be mentioned here that while existence of a single currency offers several fiscal advantages, it also involves some expenses. The most important advantage of having a common currency is microeconomic (support to perk up performance in a market by increasing endeavour, saving and competence). In other words, existence of a single currency helps individuals as well as business houses to perform their fiscal dealings in a much advanced and efficient manner. In addition, a common currency also offers macroeconomic benefits or advantages for the economy on the whole. In addition, introduction of a common currency or a currency union promotes global trade and, at the same time, diminishes the commotions caused resulting from the rise and fall in the value of currencies in a multiple currency system. At the same time, it needs to be noted that the majority of the expenses of having a common currency include political as well as macroeconomic. In addition, nations sharing a common currency may have to sustain several other imperative expenses.
First of all, nations sharing common currency or having a single currency need to relinquish their self-governing fiscal policies. Once a currency union is established, the fiscal policies of any nation that is a part of the union will lose its independence to regulate its fiscal policies. In effect, the economic policies of a currency union are administered by an international central bank and not the central banks of the respective nations. It is owing to this reason; the conjecture regarding the most advantageous or favourable currency areas underlines the significance of variable prices, mobile labor as well as monetary transfers. Since accommodating prices and mobility of labor are two vital factors related to the establishment of a currency union and also become imperative when a single currency is in existence, the governments or nations members of the union have a motivation to ensure that the markets operate more effectually.
Another consequence of establishing a currency union or having a single currency is having not as much of fiscal differentiation regionally. For instance, in the United States, the Federal Reserve is not able to bring down the interest rates in one part of the country enduring an economic slump and increase the interest rates in a different region of the union witnessing an economic boom. In fact, introduction of a common currency makes the interest rates as well as prices uniform in the majority areas having a single currency.
Most importantly, having a single currency also has its political costs all over the region where the currency is circulated. For instance, when any government, which is a member of the currency union, relinquishes its power of regulating the fiscal policy in the country to an international central bank, powers of the politicians of those nations are restricted vis-à-vis utilizing the economic policies to control or manoeuvre the macroeconomics.
All said and done, the main issue that we are dealing with in this article is whether the introduction of a common currency for Europe and the United States will actually be more resourceful compared to having numerous monies. We agree that many people would dispute that the basic disparity in having a currency union or single currency for the United States and one that encompasses both Europe and the United States would result in the incapability to utilize financial transfers to counterbalance asynchronous (absence of synchronism) in the local fiscal phases between Europe and the United States. Nevertheless, it is possible to sort out this issue by setting up special funds.
If you look at the numerous advantages of establishing a common currency, you will find that it will offer the individuals as well as business houses a wider range of fiscal options. As discussed earlier, a common or shared currency will promote international trade and consequently, it would compel the governments that are members of the currency union to diminish the prevailing trade hurdles between nations and also persuade the governments to lower the structural blockades in the path of smooth international trade. In fact, one should also include the market benefits attained from the introduction of a common or single currency in establishing a proposed Eurodollar.