If anything like a common currency were to take shape, it would be confined to a handful of countries, such as China, Russia, Iran and Venezuela.

However, it would be wrong to believe that the concept of a common global currency is unacceptable. Former Federal Reserve chairman Paul Volcker holds that a truly globalised world economy needs a global currency. About five years ago, Robert Mundell, a noted economist and Nobel Laureate, helped prepare a plan of action for a world currency along with a small group of economists and officials.

There are two issues which need to be looked at: the merits of a global common currency and whether one of the existing major currencies which make up the IMF’s SDR can be transformed into a global common currency.

The SDR is an international reserve asset. It was created by the IMF in 1969 to support the Bretton Woods’ fixed exchange rate system. As the supply of two key reserve assets — gold and the US dollar — proved inadequate for expansion of world trade and economic development, the international community decided to create a new international reserve asset under the auspices of the IMF.

The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold, which at that time was equivalent to one US dollar.

After the collapse of the Bretton Woods system in 1973, the SDR was redefined as a basket of currencies, today consisting of the US dollar, the euro, the British pound and the Japanese yen.

The US dollar value of the SDR is calculated as the sum of the specific amounts of four currencies valued in dollars, on the basis of exchange rates quoted at noon each day in the London market. For example, as of October 23, 2009, one SDR was equivalent to $1.59732, comprising the US dollar equivalent of 0.616577 for the euro, 0.632000 for the dollar, 0.0200632 for the yen and 0.148173 for the pound.

It should be noted that the SDR contains a basket of only four currencies and does not include several other important currencies such as the Australian dollar, Canadian dollar, Chinese yuan and the Indian rupee. It has limited uses, such as determination of fees by the International Postal Union and as a spin-off to determine the roaming charges for mobile telephones in certain regions, except Europe.

The SDR, consisting of a basket of just four currencies, will never find acceptance as a global reserve currency. Which currency may be more acceptable? The Japanese yen is ruled out at the outset as Japan relies on its exchange rate mechanism to boost its exports.

The then US President Ronald Reagan called Japan’s bluff in September 1985 when he declared that he would not hesitate to impose an embargo on Japanese imports if it did not correct its exchange rate mechanism.

The yen appreciated to 150 yen a dollar just on one day from the previous night’s level of 242. With the pound still not joining the Euro zone, the hypothetical choice is between the dollar and the euro.

Despite the European Union taking precautions for the euro, such asbacking it with sufficient quantities of gold, the dollar continues to dominate global currency reserves — nearly 64 per cent, against 27 per cent held in euros. Oil producing countries in the Gulf, like Saudi Arabia, prefer to price all petroleum products only in the US dollar. The euro zone hardly has any oil reserves.

For decades, the dollar has been the world’s principal reserve currency. In 1996, the dollar accounted for approximately two-thirds of the world’s foreign exchange reserves.

Many of the world’s currencies are pegged against the dollar. Countries such as Ecuador, El Salvador and Panama have dispensed with their own currencies and adopted the US dollar as their currency, a phenomenon known as dollarisation of the economy.

The US may suffer from a trillion-dollar deficit, but it is the US dollar that eminently qualifies to be the global common currency.

The European Union may consider integrating the euro with the dollar within a specified time-frame, which could lead to significant savings in transaction and hedging costs. In this process, it could try to rope in the UK and other European countries that are yet to join the Euro.

It may be recalled that after the collapse of the Bank of Iceland, there was some sentiment that the impact of the meltdown could have been mitigated had Iceland been part of the Euro zone. This view has been endorsed by several economists.

The exercise to integrate the euro with the dollar, though similar to the one undertaken in the year 1988 for establishing the euro, should not take long. The euro experience has proved that it is possible to operate a currency successfully across several sovereign states.

If countries other than Europe also wish to adopt the dollar as their currency, they should be fully prepared to embark upon a time-bound programme, like the Maastricht treaty, and avoid any sudden switch to the dollar, leaving their own national currency in the lurch.

The case of countries that resorted to dollarisation without doing any homework should be instructive in this regard.

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