The Economics and Business Studies Department

Advantages of a single Currency and Economic Integration.

This can be looked at from the perspective of the Euro single
currency or the proposed ASEAN single currency. Irrespective of
which context we look at it is essential that we understand that a
single currency goes hand in hand with greater economic
cooperation and unity of economic policy. Policies such as free
movement of labour within a single currency area are integral to this.

Reduction in Costs

a) Transaction Costs of changing money from one currency to anotherestimates have put these costs at approx 2% of income each year.
b) Reduced Uncertainty - from multi (flexible) currencies. Companies may
insure against this happening, but this is still an expense.

Increased Investment

with increased certainty both internal and international direct and portfolio
investment should increase, hopefully increasing economic and productive
efficiency and promoting economic growth. If we had a single currency in
Asia, this may attract more investment into the area.

Increased Trading

As firms will have a greater certainty about future costs and revenues they
will be more willing to partake in international trade. This will lead to
increased competition, which results in lower prices. Costs for firms may
lower as well as they take advantage of economies of scale and strive to
lower costs in the face of increased competition. See also other
advantages of international trade-absolute and comparative advantage
etc.

Independence of Monetary and Fiscal policy

No one Government will have control which will lead to more long-term
economic planning. This argument holds for an independent
European/Asian Bank as they will not alter the rate of interest for political

gain e.g., lowering unemployment at the expense of inflation, decreasing

interest rates just before an election to increase the feel good factor.
(however this could occur without an area having a single currency, as
long as they had an independent central bank-and many countries already
have this). Government Policy will hopefully follow the business cycle
rather than the election cycle. European policies should have:
a) better long-term planning
b) more efficient use of taxes (as cannot simply raise taxes, as people will
move elsewhere, as a common currency and freer markets will allow
greater labour mobility between countries).

Effects on Wages

Wages should converge and become more competitive, as workers will

realise that they are competing not only with other firms in their own
country, but also with international Firms, and workers from abroad.
However whether this is an advantage or disadvantage depends on who
you are. Workers in high wage countries may be worried about wages
falling! (Thailand and China)

Inflows of Capital to Area

eg The Euro is a major world currency and it is nearly as important as the

Dollar. Many countries have reduced the % of their reserves of Dollars and
increased their reserves of Euros. This would certainly happen with a
single Asian currency which would be far more attractive to investors than
say the Vietnamese or Cambodian currencies on their own.
This would make borrowing for these countries simpler and cheaper and
help finance Balance of Payments deficits and Budget deficits (Overall
borrowing will be easier as large sums of money available).

Disadvantages of A single Currency

Ability to set Interest Rates

By joining a single currency, a country may lose control over one of its

main economic instruments. No longer will it be able to react to

inflation by raising interest rates, as interest rates will have to be set
centrally according to what the whole single currency area requires. If
the trade cycles of different countries do not converge, some nations
will suffer as central policies may amplify any problems they already
have. Eg since the Euro Ireland has boomed and has struggled with
inflationary pressures. Germany has been in a serious downturn. How
do you set a unified monetary policy for these two countries?
No Devaluations
This will mean that domestic countries will have reduced powers to
control their economies. Regional policies will have to compensate.

Central Bank
Who will control it?

Taxes
If too high, a nation will experience a brain-drain, therefore countries
may be unwilling to tax which can lead to a decline in the provision of
services.

Level of Currency on Entry to Single currency

Arguments will take place on the level of a countrys currency as it has
implications on its exports and imports.

Conclusion? The Optimum Currency Area Theory

If all of the factors of production are mobile, economic structures and
polices are similar and there are no barriers to trade then it makes sense
to have a common currency. If not then a single currency may pose
problems as economic policies within the single currency area have to be
unified and a single policy may not be desirable for very different
performing countries. Is this the case for whole of Asia?