Can a single currency work globally?

I have had a few interesting discussions around whether or not a single global currency or even an African currency is viable.

How will it impact arbitrage, the law of one price? Currencies and stocks are affected by arbitrage due to after a certain amount of exploitation of different pricing in different markets the lower priced market regulates itself so the opportunity goes away.

How will it work practically? Especially in countries with volatile currencies such as South Africa? A great example is the hyper-inflation-struck Zimbabwe. It sometimes feels like the Rand is a price taker subject to whatever happens in the rest of the world more so than in SA. A butterfly flaps its wings on the other side of the world and the rand falls 10% to the Dollar!

If a loaf of bread costs R10, and the currency drops the impact on inflation takes a while before the loaf of bread costs R10.50. It would seem that the currency provides a buffer for consumers due to oil, production, logistics and a lot of other factors that need to be affected first before there is a price increase.

However, if we were all trading on a single currency and the local economy collapses how will the price of a loaf of bread be affected? Will the price need to fluctuate on the shelf in the store with the ‘exchange rate’ in near real time? So, it will be R10.00 in the morning, R9.50 mid-day after major sporting tournament like a soccer world cup was awarded and then R11.50 in the afternoon due to a political scandal?

The Big Mac Index tells us that the ZAR is undervalued to the USD by 55.6%. How will a single currency address this? Today the Rand is 15.40 to the Dollar. So, if a Big Mac costs R39.90 then it will cost $2.59 as opposed to the $5.81 in the US? If we go back to the arbitrage discussion, maybe someone should start exporting Big Macs to the US from SA!

There are some pros to having a single global currency, namely the reduction of exchange fees, the better utilization of money and a positive impact on free trade. And does the move to digital or crypto currencies also not make a global currency more viable? Printing money is extremely expensive not to mention the efforts that goes into curbing counterfeiting. Removing all physical notes from circulation will be a great added benefit to all countries.

On the other hand, the cons listed are the challenges faced by different economies (as mentioned above), a possible loss of financial autonomy and the impact on economies, meaning, some companies gain advantage by fluctuations in exchange rates and a single currency will introduce complexities for those opportunities.

Please provide your feedback by voting in the poll on LinkedIn.

https://www.linkedin.com/feed/update/urn:li:activity:6906540839204462592/

1 – Do you believe a single currency can work globally? (Since so many countries trade in Dollars just make the whole world trade in dollars!)

2 – Or it will only work like in the case of the Euro because those countries are 1^st world and of similar volatility?

3 – Did the Euro teach us that not even they can get it to work?

4 – It will especially not work in Africa!

Photo credits: Christine Roy & Oliver Sjöström on Unsplash