Question

The use of different national currencies creates a barrier to further growth in international business activity. What are the pros and cons, among companies and governments, of replacing national currencies with regional currencies

Answer 1

The advantages of a regional currency are given as follows:

1. Reduction in costs of transaction: For example, the Euro removes the added accounting expenses necessary to keep track of the various and fluctuating exchange rates between trading partners in the single currency zone. Also, there is also the cost of converting from one currency to another between trade partners in different countries. In a mono currency regime, these costs are eliminated and may increase the volume and frequency of trade.
2. Stability of Currency: A single currency across a community of nation-states will automatically stabilize or dampen the frequency of fluctuation given that the rate will not reflect the average economic condition of several countries put together rather than on country.
3. A regional currency is likely to be stronger than a national currency because unifying currencies eliminates competitive devaluation among countries within the region. To avoid unfair competition, neighboring countries may be forced to also devalue their currencies following similar action by a country or countries in the same block.
4. Improvement in prices due to greater price transparency: It is easier to compare prices using one currency than with different currencies. This means that companies that previously profited from abnormal profits due to various currencies are now forced to redesign their market offering to stay competitive price-wise.

Disadvantage

1. A single policy for many countries may prove to be dissastrous for some countries. Single currencies do not automatically unify all the other macro-economic conditions of the various countries in the region. This means that what is good for countries in recovery may prove detrimental for a country in a recession.
2. Transition Costs: Moving from one currency to another usually involves some costs which include:

• Discarding old currency printing equipment for new ones as well as doing away with old currencies whilst printing new ones.

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