Adopting a Common Currency And It’s Advantages Group 2 Shakul Aggarwal (07927835) S.Prashanth (07927841)

Motivation Vajpayee’s statement at SAARC Summit in 2004. ADB’s vision of a common currency for East Asia Adoption of Euro in 1999.

Vajpayee’s statement at SAARC Summit in 2004.

ADB’s vision of a common currency for East Asia

Adoption of Euro in 1999.

Euro as an example Motives for Single Currency in Europe To enhance Europe’s role in the world monetary system. To turn the European Union into truly unified market.

Motives for Single Currency in Europe

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

To turn the European Union into truly unified market.

Transformation of EU into truly unified market free trade in goods free trade in services free mobility of capital free mobility of labor Roadblock Existence of separate national currencies.

free trade in goods

free trade in services

free mobility of capital

free mobility of labor

Roadblock

Existence of separate national currencies.

The History of the Euro 30 odd years to fructify The Werner Plan The European monetary system (EMS) The ECU

30 odd years to fructify

The Werner Plan

The European monetary system (EMS)

The ECU

Werner Plan Laid out by Pierre Werner, the Finance Minister of Luxembourg in 1970 . 1 st stage: reduction of fluctuation margins between the currencies of the Members States. 2 nd stage: total liberalization of the capital movements with the integration of the financial markets 3 rd stage: irrevocable fixing of the exchange rates between the different currencies establishment of a decision center for economic policy Failed due to international turmoil at that time

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

1 st stage: reduction of fluctuation margins between the currencies of the Members States.

2 nd stage: total liberalization of the capital movements with the integration of the financial markets

3 rd stage: irrevocable fixing of the exchange rates between the different currencies

establishment of a decision center for economic policy

Failed due to international turmoil at that time

European Monetary System (EMS) Collapse of Bretton Wood System in 1971. In 1972 EEC nations linked their currencies An arrangement established in 1979 under the Jenkins European Commission The ECU An Exchange Rate Mechanism (ERM) An extension of european credit facilities. The European Monetary Cooperation Fund

Collapse of Bretton Wood System in 1971.

In 1972 EEC nations linked their currencies

An arrangement established in 1979 under the Jenkins European Commission

The ECU

An Exchange Rate Mechanism (ERM)

An extension of european credit facilities.

The European Monetary Cooperation Fund

European Currency Unit (ECU) The ECU was conceived on 13 March 1979 a basket of the currencies of the European Community member states used as the unit of account of the European Community before being replaced by the euro. On Jan 1, 1999, the Euro replaced the ECU, at the value 1 EUR = 1 ECU.

The ECU was conceived on 13 March 1979

a basket of the currencies of the European Community member states

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

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

Why was EMS not enough? Single currency was believed to produce a greater degree of European market integration than fixed exchange rates Fear of dominance of Bundesbank emphasizing German macroeconomic goals Given the free capital movements, maintaining a single currency was the best solution. Political stability of Europe

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

Fear of dominance of Bundesbank emphasizing German macroeconomic goals

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

Political stability of Europe

Roadmap to a Common Currency Trade Dependence Fiscal convergence Institutional considerations Transparency policy and statistical requirements Structural reforms

Trade Dependence

Fiscal convergence

Institutional considerations

Transparency policy and statistical requirements

Structural reforms

Optimum Currency Area (OCA) Geographical region which would maximize economic efficiency to have the entire region share a single currency

Geographical region which would maximize economic efficiency to have the entire region share a single currency

Criteria for OCA Labor mobility across the region Openness with capital mobility and price and wage flexibility An automatic fiscal transfer mechanism

Labor mobility across the region

Openness with capital mobility and price and wage flexibility

An automatic fiscal transfer mechanism

Benefits of a Common Currency Elimination of transaction costs Transparency of prices Optimal Allocation of Resources Reduced exchange rate uncertainty Low inflation, standardization of interest rates Removal of Misalignment of currencies Increasing welfare and economic growth

Elimination of transaction costs

Transparency of prices

Optimal Allocation of Resources

Reduced exchange rate uncertainty

Low inflation, standardization of interest rates

Removal of Misalignment of currencies

Increasing welfare and economic growth

Planned Common Currencies Gulf cooperation council’s planned introduction of a common currency called Khaleeji in 2010 Caribbean Single Market and Economy’s common currency due between 2010 and 2015. Southern African Development Community’s (SADC) common currency due in 2016 .

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

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

Southern African Development Community’s (SADC) common currency due in 2016 .

Conclusion Currency Union is the way to go forward as shown by the Euro Globalization Increase in the No of countries What is required? Stakeholders should form a region-wide self-help system. A strong political will .

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

Globalization

Increase in the No of countries

What is required?

Stakeholders should form a region-wide self-help system.

A strong political will .

THANK YOU!!

THANK YOU!!