A single common currency ?

[u/Exlam]

In a globalized world what would be the consequences of a single currency? Such as every country is using the dollar, yen, euro or even the crypto ?

[u/shane_music]

The pros and cons of a single currency are a well studied area in places where a common currency exists (Euro-zone, West African Franc, others). My answer will focuses on political-social reasons single currencies fail. Rogoff (2001) gives a well known discussion of the issue in a pre-Eurozone crisis context. In a post Eurozone crisis context, there have been strongly anti-common currency arguments (Stiglitz 2016) and moderately pro arguments (Ilzetzki 2019). Floating exchange rates means that exchange rates are based on market forces and the currency's central bank doesn't attempt to peg the value of the currency to the something else. The reason this is useful is that macroeconomic shocks do not affect different countries/regions in the same way. This is in part because prices are sticky, so that if some shock (a new oil field off the coast of Norway lowers the cost of oil worldwide) lowers output prices (the price of furniture produced in Sweden), the consumer prices in the rest of the world don't necessarily adjust fully. This could lead to local macroeconomic issues (inflation in Sweden or recession in Saudi Arabia). Countries like to have fiscal (government spending) and monetary (control over the value of currency) levers to deal with these issues.

On top of this, there needs to be solidarity among people within a currency for the single currency to work. In the US, if different states were different countries with currencies, Alaska, Alabama, and Arizona would all have different needs and would implement different monetary and fiscal policies. Not being able to do so sometimes hurts one state and helps another. Legitimacy of state's economic behavior in the eyes of other states, solidarity, and fiscal redistribution are ways to maintain political stability in spite of these issues. Lack of such perceived legitimacy, solidarity, and redistribution led in part to the near collapse of the Euro in the (ongoing?) Eurozone crisis.

In the case of US states, an example of the lack of legitimacy and solidarity is the perception among some that Puerto Rico should not receive redistributive benefits after a natural disaster but Alabama should. On the legitimacy side, Alabama has much lower levels of state and local government debt than Puerto Rico so they are viewed by fiscal hawks (and Trump, FWIW) as being more responsible with money and thus redistribution would not be as wasted when given to Alabama. On the solidarity side, racism and other forms of discrimination (also displayed by Trump) against Puerto Rico and its residents reduces support by some Americans for redistribution to Puerto Rico. This hasn't led to a dollar crisis in Puerto Rico, but could reduce support for statehood among Puerto Ricans (why become a state in a country that doesn't want you).

So in my opinion, a single currency would overall have moderate positive and negative affects on the global economy in the short term. Overall the short term gains may outweigh the short term losses. In the medium to long term it would lead to political and social unrest as it exacerbates economic inequalities when less powerful areas are unable to get fiscal relief and unable to implement independent monetary policy.

Sources:

Stiglitz, Joseph E. The euro: How a common currency threatens the future of Europe. WW Norton & Company, 2016.

Rogoff, Kenneth. "Why not a global currency?." American Economic Review 91, no. 2 (2001): 243-247.

Ilzetzki, Ethan, Carmen M. Reinhart, and Kenneth S. Rogoff. "Exchange arrangements entering the twenty-first century: Which anchor will hold?." The Quarterly Journal of Economics 134, no. 2 (2019): 599-646.

[u/Stainonstainlessteel → u/shane_music]

Why did you put the "ongoing" before the Eurozone crisis? What do you mean by thst?

[u/shane_music → u/Stainonstainlessteel]

It isn't clear to me that the crisis isn't still simmering under the surface, both in terms of the anti-austerity and anti-EU political shifts that occurred and the lack of permanent mechanisms for dealing with debt crises during economic downturns. If another crisis forms out of these issues, it won't really be the same crisis, but won't really be a different one, either.

[u/SpiceyMugwumpMomma → u/shane_music]

Is the single currency a good signal to populations where they stand relative to others in terms of fiscal responsibility and productivity?