Re: On EdgeNovember 3 2011 at 3:35 PM
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|street man |
Response to On Edge
@Lepatu....In an economic perspective, a single currency for Pacific nations will maximize economic efficiency to have the entire region share a single currency. There are many benefits for this. First and foremost, the rules of engagement must be well defined before the set up of a single currency. Rules to limit a country's annual deficit to certain per cent of gross domestic product, and the total accumulated debt to certain per cent of G.D.P so that no nation's annual deficient goes below sending it to bankruptcy.
The most obvious benefit of adopting a single currency for the Pacific region is to remove the cost of exchanging currency, theoretically allowing businesses and individuals to consummate previously unprofitable trades. For consumers, banks in the Pacific currency will charge the same for intra-member cross-border transactions as purely domestic transactions for electronic payments (e.g., credit cards, debit cards and cash machine withdrawals).
The absence of distinct currencies also removes exchange risks. The risk of unanticipated exchange rate movement adds additional risk or uncertainty for companies or individuals that invest or trade outside their own currency zones. Companies will hedge against this risk and will no longer need to shoulder additional cost and this will be particularly important for Pacific Island nations whose currencies traditionally fluctuate great deal.
Financial markets in the region will be expected to be far more liquid and flexible than they were in the past. The reduction in cross-border transaction costs will also allow larger banking firms to provide a wider array of banking services that can compete across and beyond the Pacific region, such as BSP. Another effect of the common Pacific currency is that differences in prices – in particular in price levels – should decrease because of the 'law of one price'.
However, the problem with this is that differences in prices can trigger speculative trade in some commodities across borders purely to exploit the price differential. Therefore, prices on commonly traded goods are likely to converge, causing inflation in Small Island nations like Tuvalu, Kiribati, Samoa, etc and deflation in others during the transition.
A single currency will foster financial integration especially with respect to the securities markets. It will lead to an integration in terms of investment in bond portfolios, with Pacific Island nations with AUS & NZ lending and borrowing more between each other than with other countries. It will decrease the interest rates of most members countries, in particular those with a weak currency. As a consequence the market value of firms from countries which previously had a weak currency will significantly increase.
However, the risk is that if one country fails and breaks the rules of management, it can plunge the rest into collapse. There are lessons that must be learnt from the EURO and its effects on the 27 European countries were tied to Euro currency.