By Milan Adams
Preppgroup
September 10, 2025
Here is the detailed explanation from a user's.
Assuming the whole world starts sharing a common currency whilst maintaining all existing border controls and barriers to trade and the movement of goods, capital and labour, there would be some fairly disastrous effects.
(TL;DR: most countries would exist in a state of disequilibrium, with very high unemployment in some and very high inflation in others, due to asymmetric economic shocks. Exporting firms would find it cheaper to obtain finance and international trade would increase significantly. Most nations would end up finding a World Currency very painful, and the only way to conceivably even slightly make it work is with a World Federation, i.e.: abolishing the idea of sovereign nations).
First, defining what a single currency entails: it means that all countries would give-up control of their money supply and interest rates (i.e.: monetary policy) to a hypothetical World Central Bank. This is NOT the same as the World Bank, which gives loans for development projects in countries - the World Central Bank instead would control the global money supply and interest rates for this new currency.
Secondly, some definitions: monetary policy is control the money supply and interest rates, and is managed by the central bank. Fiscal policy is control of government finances, and includes things like tax rates, government spending etc. The exchange rate is the value of the currency against other outside currencies - in a common global monetary union, take that to be the nominal value of the currency.
Now, it's important to understand the idea of an "Optimum Currency Area (OCA)", that is, a cluster/region of countries that can form a currency union without significant negative economic effects.
There are various theories for what constitutes an OCA, but the most famous is the one developed by Canadian economist Robert Mundell, who won the Nobel Memorial Prize in Economics for his work on OCAs and monetary union in 1999. Mundell theorised that currency unions need to have a high level of labour and capital mobility to work successfully. Say country A and country B share a currency (enter a currency union). Now, an asymmetric shock (which is an economic shock that impacts different countries in different ways) hits A negatively, causing a contraction of aggregate demand (AD) in country A. If it had its own currency, its exchange rate would depreciate against the rest of the world to restore competitiveness, reducing the price of exports and increasing the quantity of exports sold. This will allow AD to start increasing again and equilibrium will be restored. In a currency union, the exchange rate will depreciate slightly, but not all the way, as country B has not had a contraction of demand. This means both countries will now exist in a macroeconomic disequilibrium: A's exchange rate is overvalued, hurting competitiveness and causing unemployment, and B's exchange rate is undervalued, increasing exports and causing inflationary pressure. To restore equilibrium, labour and capital needs to be able to move from A into B - hence, an Optimum Currency Area needs a high level of labour and capital mobility across borders.
The incredibly highly integrated Eurozone, which has open borders and a common factor markets, already suffers from insufficient labour mobility across borders for a number of reasons, including differences in pension schemes, language barriers, differences in qualification acceptance etc. So the world does not in any capacity have sufficient mobility of labour and capital across borders: there are way too many barriers to the movement of factors of production. A world-currency implemented under anything close to the status-quo idea of independent nation states and borders would result in most countries being in a permanent state of disequilibrium, with high unemployment in some places and high inflation in others.
The world as a whole is also far too vulnerable to asymmetric shocks for it to be an OCA. Commodity-exporting countries in particular struggle to join OCAs as shocks to commodity markets are often far sharper than shocks that hit other industries.
In addition, countries would lose the ability to use monetary policy to correct economic shocks, that is, raising interest rates in times of high inflation and lowering them in times of high unemployment and low inflation. They would be forced to use fiscal policy to correct shocks, but different countries have different approaches to fiscal policy and without some sort of fiscal-policy rules and fiscal transfers implemented by the World Authority overseeing this, there would likely be many cases of countries' fiscal responses negatively impacting other nations who are in different stages of their economic cycle; the global interest rate for some countries would end up too high and for others, too low. There is also the issue that many countries would become more vulnerable to sovereign default as they would have foregone control of interest rates and the money supply. This would likely result in a series of Greek-like disasters in countries with severe downturns, particularly in countries with poor fiscal discipline.
The case of the Eurozone shows its almost impossible to make a successful currency union without fiscal union and transfers, which effectively means to make a currency union work it needs to be federal entity with a common government.
Finally, Ronald McKinnon and the McKinnon Criterion tells us that in order to minimise the likelihood of asymmetric shocks, countries that enter a currency union should/must have a high level of trade amongst each other. This is not true for the whole world, and likely will not be for the forseeable future purely down to distances (the Gravity Model of trade tells us the value of trade between two nations is inversely proportional to the distance between them).
Now, common currency areas DO see increases in trade as common currencies reduce the cost of exporting and importing. It also reduces the uncertainty export-industry firms face in what their foreign revenues will be, which without a currency union, would fluctuate depending on the exchange rate. This increases investors' and banks' confidence in these firms, reducing their cost of obtaining finance and increasing production, thereby increasing exports. When this occurs in all currency union members, you get a surge in trade. Some economists therefore theorise that the creation of OCA is endogenous to STARTING a currency-union, in that a common currency facilitates more trade which brings the union closer to an OCA.
It also can make firms more efficient. As an example, pre-Eurozone, it was common for unions to negotiate high wages, which firms would accept, expecting the government to devalue the exchange rate to reduce the price of exports and make up for the lost competitiveness. Workers in different countries were effectively competing against each other; the introduction of a common currency, the Euro, removed this mechanism, making wage-setting more economically sensible and firms more competitive, reducing prices.
Overall, in the status-quo, a world currency union would result in the vast majority of countries being in a state of economic disequilibrium. For it to even slightly work, you would need a common world government with fiscal rules at the very least, and a world federation at best - and even then, much of the world would remain in disequilibrium as asymmetric shocks can never be totally removed.
Now, if you propose a global currency union AND the removal of all barriers to the movement of goods, capital and labour (i.e.: an open border world), with a common government, that gets more interesting but is beyond the scope of what I can answer at the moment.
This article was originally published on Preppgroup.