Why single currency is not good thing?

Recently there is daily news on Euro collapse. Here we are not speculating whether Euro will collapse or not but we shall examine whether single currency is a good idea or not.

Before the currency system was invented people used bartering system to conduct trade. For example, you give me fish and I shall give you few eggs. Obviously it caused problem when buyer and seller did not have any common product for exchange. The introduction of currency (i.e. paper notes and coins) solved this problem.

If several countries use same currency (like Euro), there are benefits and pitfalls. If a country has its own currency, it can devalue that to make their export appear cheaper to outside world. That means they can offer cheaper goods to other countries. While their own citizens can’t buy those goods so cheap, they can still earn a good living within their home country. Of course this assumes that they produce goods which are in demand in other countries. China is a good example for this. They produce so many good for the whole world but their own citizens can’t afford all those luxury items. However, the wage they get by selling these products, they can afford basic necessities in life like food, shelter etc.

Another example is controlling of economic policies. A country can reduce its national interest rate to encourage businesses to borrow money (which will then roll into economy). If there is inflation, then government can tackle it by raising interest rate.

So, simply speaking, own currency gives the government to regulate their own economy in easier way.

But own currency has drawbacks as well – mainly for outsiders who invest in that country using that currency. Since government can devalue the currency (say Greek Drachma), an outsider (who invested in dollars) will see their asset reduced. For example, they invested $ 100 at the beginning when $1 = 10 Drachma. But later government made it $1 = 20 Drachma. So their asset is now worth just $50.

When many countries use single currency, that sort of devaluation is less likely. So an investor is more likely to see his asset not losing value – like $1 = €1 can stay for a long time. This will encourage investors to roll more money into common currency market. Thus common currency is better for economic growth.

It will also prevent losing of money during currency fluctuation, commission during exchange etc. – which is considerable if we take into account the daily amount of inter-currency trades.

Single currency works well when all participants have common economic interest. That “common” bit is quite important.

But all the advantages of own currency we discussed before will appear as disadvantage to common market. For example, Greece can’t devalue Euro to attract more tourists. It can’t control its interest rate. If they do so, it will upset other Euro countries like Germany, France etc. So only way to make Greece become competitive is to cut cost of production – by paying less wage to people, for example (which is the austerity measure and naturally its citizens don’t like that).

As we have already stressed a common economic goal is necessary, it becomes problematic when one group of people (i.e. one country) want to eat a bigger share of the cake. If Greek people want a better standard of living by working less hours (i.e. being less productive) it does not attract praise from German people. This becomes a way funding one friend’s lavish lifestyle by another friend. When Greece spent too much, they ran out of money (i.e. cash flow problem). Then other countries had to give them more money (i.e. bail out) to keep their economy going.

Will you prefer funding a friend’s luxury lifestyle when you are struggling yourself? I guess not. That is why other Euro nations are shouting. The way out is to dump the odd friend (Greece in this case).

So what will happen if Greece leaves the Euro zone? In spite of all the scaremongering nothing serious should happen (although there is a probability of short term economic turmoil). Greece will revert to its Drachma. Many banks (or investors) who lent to Greek economy will see their loans wiped off or assets significantly reduced. This may cause for those banks trying to compensate for that loss from other markets – by means of making their products more expensive to others.

In future this can happen to another country. Then they will leave Euro as well. People will then start wondering when the next country will leave. This will hurt consumers (and investors) confidence. People will start to believe that Euro is no longer stable and thus they will try to offload Euro investments. This will cause impact on economy.

If this cycle goes for long, ultimately single currency will lose relevance.


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2 Responses to “Why single currency is not good thing?”

  1. Candy Angeron Says:

    Very nice website, thanks for share this article with us

  2. julia Says:

    thanks, it helped!

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