Adopting a Common Adopting a Common CurrencyCurrency

And It’s AdvantagesAnd It’s Advantages

Group 2Group 2Shakul Aggarwal (07927835)Shakul Aggarwal (07927835)

S.Prashanth (07927841)S.Prashanth (07927841)

MotivationMotivation

Vajpayee’s statement at SAARC Summit in 2004.Vajpayee’s statement at SAARC Summit in 2004.

ADB’s vision of a common currency for East AsiaADB’s vision of a common currency for East Asia

Adoption of Euro in 1999.Adoption of Euro in 1999.

Euro as an exampleEuro as an example

Motives for Single Currency in EuropeMotives for Single Currency in Europe

To enhance Europe’s role in the world monetary system.To enhance Europe’s role in the world monetary system.

To turn the European Union into truly unified market.To turn the European Union into truly unified market.

Transformation of EU into truly unified Transformation of EU into truly unified marketmarket

free trade in goodsfree trade in goods

free trade in servicesfree trade in services

free mobility of capitalfree mobility of capital

free mobility of laborfree mobility of labor

RoadblockRoadblock Existence of separate national currencies.

The History of the EuroThe History of the Euro

30 odd years to fructify30 odd years to fructify

The Werner Plan The Werner Plan The European monetary system (EMS)The European monetary system (EMS) The ECUThe ECU

Werner PlanWerner Plan

Laid out by Pierre Werner, the Finance Minister of Luxembourg in Laid out by Pierre Werner, the Finance Minister of Luxembourg in 1970 .1970 .

11stst stage: reduction of fluctuation margins between the currencies of stage: reduction of fluctuation margins between the currencies of the Members States. the Members States.

22ndnd stage: total liberalization of the capital movements with the stage: total liberalization of the capital movements with the integration of the financial marketsintegration of the financial markets

33rdrd stage: irrevocable fixing of the exchange rates between the stage: irrevocable fixing of the exchange rates between the different currenciesdifferent currencies

establishment of a decision center for economic policyestablishment of a decision center for economic policy

Failed due to international turmoil at that timeFailed due to international turmoil at that time

European Monetary SystemEuropean Monetary System (EMS) (EMS)

Collapse of Bretton Wood System in 1971.Collapse of Bretton Wood System in 1971.

In 1972 EEC nations linked their currencies In 1972 EEC nations linked their currencies

An arrangement established in 1979 under the Jenkins European An arrangement established in 1979 under the Jenkins European CommissionCommission

The ECU The ECU An Exchange Rate Mechanism (ERM) An Exchange Rate Mechanism (ERM) An extension of european credit facilities. An extension of european credit facilities. The European Monetary Cooperation FundThe European Monetary Cooperation Fund

European Currency Unit European Currency Unit (ECU)(ECU) The ECU was conceived on 13 March 1979 The ECU was conceived on 13 March 1979

a basket of the currencies of the European Community member a basket of the currencies of the European Community member statesstates

used as the unit of account of the European Community before used as the unit of account of the European Community before being replaced by the euro.being replaced by the euro.

On Jan 1, 1999, the Euro replaced the ECU, at the value 1 EUR = 1 On Jan 1, 1999, the Euro replaced the ECU, at the value 1 EUR = 1 ECU.ECU.

Why was EMS not enough?Why was EMS not enough?

Single currency was believed to produce a greater degree of Single currency was believed to produce a greater degree of European market integration than fixed exchange ratesEuropean market integration than fixed exchange rates

Fear of dominance of Bundesbank emphasizing German Fear of dominance of Bundesbank emphasizing German macroeconomic goals macroeconomic goals

Given the free capital movements, maintaining a single currency Given the free capital movements, maintaining a single currency was the best solution. was the best solution.

Political stability of EuropePolitical stability of Europe

Roadmap to a Common CurrencyRoadmap to a Common Currency

Trade DependenceTrade Dependence

Fiscal convergenceFiscal convergence

Institutional considerationsInstitutional considerations

Transparency policy and statistical requirementsTransparency policy and statistical requirements

Structural reformsStructural reforms

Optimum Currency Area (OCA)Optimum Currency Area (OCA)

Geographical region which would maximize economic efficiency to Geographical region which would maximize economic efficiency to

have the entire region share a single currencyhave the entire region share a single currency

Criteria for OCACriteria for OCA

Labor mobility across the region Labor mobility across the region

Openness with capital mobility and price and wage flexibility Openness with capital mobility and price and wage flexibility

An automatic fiscal transfer mechanismAn automatic fiscal transfer mechanism

Benefits of a Common CurrencyBenefits of a Common Currency Elimination of transaction costsElimination of transaction costs

Transparency of prices Transparency of prices

Optimal Allocation of ResourcesOptimal Allocation of Resources

Reduced exchange rate uncertainty Reduced exchange rate uncertainty

Low inflation, standardization of interest rates Low inflation, standardization of interest rates

Removal of Misalignment of currenciesRemoval of Misalignment of currencies

Increasing welfare and economic growthIncreasing welfare and economic growth

Planned Common CurrenciesPlanned Common Currencies

Gulf cooperation council’s planned introduction of a Gulf cooperation council’s planned introduction of a common currency called common currency called KhaleejiKhaleeji in 2010 in 2010

Caribbean Single Market and Economy’s common Caribbean Single Market and Economy’s common currency due between 2010 and 2015.currency due between 2010 and 2015.

Southern African Development Community’s (SADC) Southern African Development Community’s (SADC)

common currency due in 2016common currency due in 2016. .

Conclusion Conclusion

Currency Union is the way to go forward as shown by the EuroCurrency Union is the way to go forward as shown by the Euro

GlobalizationGlobalization Increase in the No of countriesIncrease in the No of countries

What is required?What is required? Stakeholders should form a region-wide self-help system.Stakeholders should form a region-wide self-help system. A strong political will .A strong political will .

THANK YOU!!THANK YOU!!