Adopting A Common Currency

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Adopting A Common Currency

  1. 1. Adopting a Common Currency And It’s Advantages Group 2 Shakul Aggarwal (07927835) S.Prashanth (07927841)
  2. 2. Motivation <ul><li>Vajpayee’s statement at SAARC Summit in 2004. </li></ul><ul><li>ADB’s vision of a common currency for East Asia </li></ul><ul><li>Adoption of Euro in 1999. </li></ul>
  3. 3. Euro as an example <ul><li>Motives for Single Currency in Europe </li></ul><ul><li>To enhance Europe’s role in the world monetary system. </li></ul><ul><li>To turn the European Union into truly unified market. </li></ul>
  4. 4. Transformation of EU into truly unified market <ul><li>free trade in goods </li></ul><ul><li>free trade in services </li></ul><ul><li>free mobility of capital </li></ul><ul><li>free mobility of labor </li></ul><ul><li>Roadblock </li></ul><ul><li>Existence of separate national currencies. </li></ul>
  5. 5. The History of the Euro <ul><li>30 odd years to fructify </li></ul><ul><li>The Werner Plan </li></ul><ul><li>The European monetary system (EMS) </li></ul><ul><li>The ECU </li></ul>
  6. 6. Werner Plan <ul><li>Laid out by Pierre Werner, the Finance Minister of Luxembourg in 1970 . </li></ul><ul><li>1 st stage: reduction of fluctuation margins between the currencies of the Members States. </li></ul><ul><li>2 nd stage: total liberalization of the capital movements with the integration of the financial markets </li></ul><ul><li>3 rd stage: irrevocable fixing of the exchange rates between the different currencies </li></ul><ul><li>establishment of a decision center for economic policy </li></ul><ul><li>Failed due to international turmoil at that time </li></ul>
  7. 7. European Monetary System (EMS) <ul><li>Collapse of Bretton Wood System in 1971. </li></ul><ul><li>In 1972 EEC nations linked their currencies </li></ul><ul><li>An arrangement established in 1979 under the Jenkins European Commission </li></ul><ul><li>The ECU </li></ul><ul><li>An Exchange Rate Mechanism (ERM) </li></ul><ul><li>An extension of european credit facilities. </li></ul><ul><li>The European Monetary Cooperation Fund </li></ul>
  8. 8. European Currency Unit (ECU) <ul><li>The ECU was conceived on 13 March 1979 </li></ul><ul><li>a basket of the currencies of the European Community member states </li></ul><ul><li>used as the unit of account of the European Community before being replaced by the euro. </li></ul><ul><li>On Jan 1, 1999, the Euro replaced the ECU, at the value 1 EUR = 1 ECU. </li></ul>
  9. 9. Why was EMS not enough? <ul><li>Single currency was believed to produce a greater degree of European market integration than fixed exchange rates </li></ul><ul><li>Fear of dominance of Bundesbank emphasizing German macroeconomic goals </li></ul><ul><li>Given the free capital movements, maintaining a single currency was the best solution. </li></ul><ul><li>Political stability of Europe </li></ul>
  10. 10. Roadmap to a Common Currency <ul><li>Trade Dependence </li></ul><ul><li>Fiscal convergence </li></ul><ul><li>Institutional considerations </li></ul><ul><li>Transparency policy and statistical requirements </li></ul><ul><li>Structural reforms </li></ul>
  11. 11. Optimum Currency Area (OCA) <ul><li>Geographical region which would maximize economic efficiency to have the entire region share a single currency </li></ul>
  12. 12. Criteria for OCA <ul><li>Labor mobility across the region </li></ul><ul><li>Openness with capital mobility and price and wage flexibility </li></ul><ul><li>An automatic fiscal transfer mechanism </li></ul>
  13. 13. Benefits of a Common Currency <ul><li>Elimination of transaction costs </li></ul><ul><li>Transparency of prices </li></ul><ul><li>Optimal Allocation of Resources </li></ul><ul><li>Reduced exchange rate uncertainty </li></ul><ul><li>Low inflation, standardization of interest rates </li></ul><ul><li>Removal of Misalignment of currencies </li></ul><ul><li>Increasing welfare and economic growth </li></ul>
  14. 14. Planned Common Currencies <ul><li>Gulf cooperation council’s planned introduction of a common currency called Khaleeji in 2010 </li></ul><ul><li>Caribbean Single Market and Economy’s common currency due between 2010 and 2015. </li></ul><ul><li>Southern African Development Community’s (SADC) common currency due in 2016 . </li></ul>
  15. 15. Conclusion <ul><li>Currency Union is the way to go forward as shown by the Euro </li></ul><ul><li>Globalization </li></ul><ul><li>Increase in the No of countries </li></ul><ul><li>What is required? </li></ul><ul><li>Stakeholders should form a region-wide self-help system. </li></ul><ul><li>A strong political will . </li></ul>
  16. 16. <ul><li>THANK YOU!! </li></ul>

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