Despite trend toward fewer currencies, a single world currency seems unlikely in near future

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As international monetary and financial transactions become increasingly integrated, some countries have chosen to form regional currency blocs, while others have established rigid exchange rate pegs to other countries, through the adoption of a currency board, or have adopted the currency of another country as their own. This declining trend in the number of independent currencies seems to be motivated by the perceived benefits of currency integration—such as commercial efficiencies and economies of scale. But would the same perceived benefits be further maximized by a move to a single currency for the world? Or does the experience of the euro zone so far suggest that the difficulties inherent in corralling different and divergent economies into a single currency would be magnified and possibly disastrous if carried out worldwide?

These questions and related issues were the subject of a recent IMF Economic Forum—“One World, One Currency: Destination or Delusion?” moderated by Alexander Swoboda, Senior Policy Advisor in the IMF’s Research Department. Participants included Robert Mundell, Professor of Economics at Columbia University and winner of the 1999 Nobel Prize for Economics; Maurice Obstfeld, Professor of Economics at the University of California, Berkeley; and Paul Masson, Senior Advisor in the IMF Research Department.

A world currency area

The concept of a single world currency, Mundell said, has few, if any, champions. It is not likely, particularly among democratic regimes, that the requisite political motivation could be found to convince countries to relinquish their national currency, which is symbolic of national sovereignty, in favor of a single currency. Although he is a longtime advocate of a world currency, Mundell said it was probably more interesting to talk about “one world, one currency area”—that is, a zone of fixed exchange rates.

Despite the current problems the euro zone is experiencing, Mundell said he was confident the union would prevail. Already, he suggested, every country that has joined the Economic and Monetary Union (EMU) has a better monetary policy than it had before it joined. Speculative capital movements have been virtually eliminated, and since EMU’s implementation, there has not been a single intra-Europe financial crisis.

In Mundell’s opinion, one reason that EMU has worked and will continue to work is that it has satisfied the basic requirements of an optimal currency area:

• common target or anchor for monetary policy;

• common measure for inflation;

• locked exchange rates, implying a common monetary policy; and

• means for dividing up the seigniorage (a source of revenue derived from the government’s right to create money).

If the euro zone has met these requirements, Mundell asked, could they be met...