Should There Be a Global Central Bank?

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SHOULD THRE BE A GLOBAL CENTRAL BANK 1

Should There Be aGlobal Central Bank?

For the last decade, there has been a heated debate on whether theworld needs a global bank and the G20 has been at the center of thisdebate. The debate has been steered by the success of the EuropeanCentral Bank, which has opened the European region, and all these hasbeen made possible by a common monetary policy. However, thisrequires a single currency, and there is an evident problem as somecountries have an inherent advantage given to them by their strongcurrency whenever they trade with weaker countries, and they are notready to let go.

A global bank could serve several countries in the manner that theEuropean Central Bank now does. With a single central bank, therecould be a single monetary policy across all countries and there aremany advantages that come with this. First, The European Central Bankhas monetary unification that helps abolish competitive advantage,achieve broader and deeper equity and debt while at the same timetriggering increased competition. For instance, according to Garten(2009), the annual cross border trade increased from $1.1 million in1990 to $11 trillion in 2007 with the help of the European Union.Second, just like the case of the European Central Bank, transactioncost is reduced with a single monetary policy. Statistics show that atrader trespassing all the members of the European countries wouldend up with 40% less of what they hand at the beginning of theirjourney before the European Union was formed (Garten, 2009). Besides,it will be easier for individuals despite their financial literacy totrade with different countries. This is because, with a singlecurrency, there is no currency exchange which will not only save timebut will attract many individual to trade outside their countries.

On the other hand, a global central bank could create a globalmonetary policy only if a single currency was to be used throughoutthe world. However, all countries would not agree on the monetarypolicy that would be appropriate. The Dollar is the most usedcurrency globally. This put individuals who earn their wages in thedollar at an advantage when buying from countries with weakercurrencies. This is because individuals with dollars have more buyingpower. However, with a single currency, no individual from any partof the world will have the advantage of a strong currency and whilethis is a good thing to developing countries, it would be unfair tothe developed countries such as America. As Schoez (2009) says, theuse of the dollar as the reserve currency gives America a dominantposition in the world`s economy. Besides, this means that globalcountries have to adhere to the America`s monetary and fiscalpolicies, yet they do not have any control over them. Additionally,some countries such as China tend to devalue her currency to gain anadvantage as her goods are cheaper when compared to that from otherequally developed countries (Schoez, 2009). However, just likecountries such as America will lose their advantage point with theintroduction of a single currency, China will also lose the advantagethat comes with devaluing her currency. For these reasons, larger orstronger countries will not agree to the idea of a single currency assmaller countries offer less on the table while they contribute thelarger part.

In conclusion, a global central bank will eradicate the currencydevaluation, increase competition and cross-border trade. This willbe possible with the eradication of exchange rates. On the otherhand, the single monetary policy requires a single currency, and thismeans that some countries will lose their advantage. For example,Americans will lose her increased buying power that comes having thedollar as the reserve currency. On the other hand, China with hertendency to devalue her currency that gives her products acompetitive advantage in international markets will not be able to dothis with a single world currency. Lastly, a single monetary policymeans that only smaller countries will benefit much from thearrangement.

References

Garten, J. (2009). “The Case for a Global Central.” Accessed onMarch 27, 2016.http://www.bloomberg.com/news/articles/2009-09-17/the-case-for-a-global-central-bank

Schoez, J. (2009). “What if the World all Used the Same Currency?”Retrieved on March 27, 2016, http://www.nbcnews.com/id/30047877/ns/business-answer_desk/t/what-if-world-all-used-same-currency/#.VvfJ0cp95dh