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Is a Global Currency a Realistic Possibility?


    The idea of a global currency has gained some traction in the last decade.  The experiment in the EuroZone has actually offered economists a real-time front-row view of how countries are affected when they come under a common currency.  During the spring of 2009, the global recession seemed to have bottomed out and economic growth slowly returned to developed nations around the world.  It was at this time that the U.S. Dollar began to depreciate rapidly against the Euro.  The EuroZone had injected far less stimulus into its economy, and it had left interest rates at 1%, which was much higher than the near 0% rates in the U.S.  All of this coupled with the fact the EuroZone appeared to be emerging from the economy quicker and in a more economically robust manner, caused investors to begin betting that the EuroZone would raise interest rates well before the U.S., which would only serve to increase the yield spread between the two currencies, in favor of the Euro.  This all combined to cause serious conversations to arise around the world in powerful economic circles of the possibility that the Euro could replace the Dollar as the world reserve currency.  This possibility, if ever realized, would be a first step toward a global currency.  But things didnít work out that well for the Euro.

     In November of 2009, it became apparent that Greece and several other EuroZone countries were in major trouble.  The very real threat of sovereign default in Greece, Spain, Portugal, Italy, and Ireland caused a massive run on the Euro versus the Dollar, as it depreciated from over $1.50 to a low of $1.18 in just 5 months.  The EuroZone went from the being the economic champion of the world during the spring of 2009 to facing the very real possibility of a complete break-up.  During the height of the crisis in the spring of 2010, rumors in the financial media began that Germany and/or France was going to pull out of the EuroZone, or that Greece was going to be kicked out.  Eventually, the European Central Bank and International Monetary Fund stepped in and pledged bailout funds for struggling EuroZone countries.  This act reassured market participants that no country would default in the short-term and the Euro found temporary relief.  This entire scenario in the EuroZone over the last 18 months offers economists a very interesting perspective on why a global currency will not happen anytime soon, or possibly ever.

The Major Concern

    During the EuroZone Debt Crisis, several of the major weaknesses of the system were exposed.  When the EuroZone formed and issued its common currency over a decade ago, Milton Friedman, the renowned 20th century economist, stated that it was only time before the EuroZone failed.  He believed that when the first major economic speed bump was hit, the EuroZone would most likely fall apart.  Although the EuroZone has remained intact at the moment, no one really knows what the future holds for the EuroZone.  Friedmanís concern was in the EuroZone every country is subject to the monetary policy decisions of the European Central Bank, but they still each have sovereign control of their fiscal decisions.  Thus, countries like Greece, Portugal, and Spain were able to have very loose fiscal policies in place that caused enormous budget deficits to build.  Most countries would have the power to manipulate the strength of their currency in order to survive in times of economic recession.  This is not possible in the EuroZone, though.  Many economists fear that these struggling EuroZone countries will eventually have to leave the EuroZone and resurrect their national currencies, then devalue them in order to stimulate exports and economic growth.  Then, once their fiscal houses have been brought to order, which would take several years, these countries could re-join the EuroZone.  Many economists would like to see a mechanism developed by the ECB that would allow these countries to temporarily leave the EuroZone to do this exact thing, and this would have a large impact on forex trading.

    A global currency would have the same effect on particular countries that the Euro has had on weak EuroZone countries.  Sure, the Euro has been great for Germany and France, the economic powers of the EuroZone, but the benefits are quickly eroding for weaker economies.  These weak countries have to be subject to the same monetary policy decision as stronger economies, and the fact is that each country moves through a recession at a different velocity.  If this situation cannot be carried out in Europe where most countries share common cultural values and a deep history of relationship,  how could it possibly work in a global setting between countries that do not have these shared cultural values and established relationships?  The truth is that it canít be done, at least in the current global economic system.  We are currently seeing the experiment break down in Europe, and Milton Friedmanís words are beginning to ring true.


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