This study was stimulated by the recent successful launch of the euro, the prospect of official "dollarization" in Argentina and Mexico, the relatively poor performance of the Canadian economy, and the depreciation of the Canadian dollar during the last 25 years--and especially in 1998.
Canada's flexible exchange rates have contributed to poor economic performance. On the one hand, they have cushioned the producers of commodities from the effect of lower world prices. On the other hand, they have caused a reduction in labour-market flexibility and delayed adjustment to the long-term decline in the world prices of natural resources. They also brought high currency-exchange costs and a significant risk premium on Canadian interest rates.
The plan for a North American Monetary Union presented in this study is designed to include Canada, the United States, and Mexico. Under the proposed plan, bank notes and coins of the currency (tentatively called the "amero" ) will have "amero" symbols on one side and national emblems on the other to preserve important symbols of national identity. The conversion of existing currencies into the amero will take place at rates that leave unchanged each country's real income, wealth, and international competitiveness at the time of conversion.
The North American Central Bank, like the European Central Bank, will have a constitution making it responsible only for the maintenance of price stability and not for full employment. The three countries in the union will have representatives on the Bank's board in numbers reflecting their relative size in terms of some weighted average of population and national income, with the weights to be determined through negotiations. Every country will receive the profits from the issuance of ameros used domestically.
Trade among the members of the monetary union will be stimulated by the elimination of the costs of currency trading and risk. There will be greater price stability and, importantly, interest rates in Canada will fall by about one percentage point.
Against these gains in economic efficiency must be weighed possible losses in macroeconomic performance. These losses will be small or non-existent. Flexible exchange rates have not brought Canada the macroeconomic benefits promised by advocates of such a policy. Unemployment has remained high and economic growth has been slow. Changes in economic thinking and the experience of many countries have shown that the economic fine-tuning possible under flexible exchange rates has been a failure. Labour-market flexibility, essential for dealing with economic shocks, was lowered by the very existence of flexible exchange rates. The temporary protection offered producers and workers by exchange-rate deprecation has generated inefficiencies much like temporary protection through tariffs is known to have done in the past.
Canada's cultural sovereignty and political independence are not affected by monetary union. Just as in the case of free trade, there is nothing in any treaty for monetary union that interferes with Canada's ability to pursue taxation, spending, social, regulatory, or foreign policies different from those of the United States.
A small political movement for monetary union already exists. It will gain strength if the Canadian economy continues its recent record of poor performance. Even if the world prices of commodities and the exchange rate should recover, history shows that the exchange rate will not return to its old level. All Canadians will be permanently poorer. At the same time, the rise in the exchange rate taking place will cause unemployment and government deficits. Business and the general public will increasingly look to monetary union as a solution to these problems, especially if the euro succeeds.
The United States has less to gain from a monetary union than Canada and Mexico but there will be some benefits. Monetary union will reduce the threat to the power of the US dollar resulting from the greater use of the euro in place of the dollar in the rest of the world. Further, the United States will benefit from having more stable and prosperous countries as neighbours. When the United States joined other international organizations like the IMF, the World Bank, the World Trade Organization, and the North American Free Trade Agreement, the expected economic and political gains appeared to offset the surrender of some national sovereignty. In this tradition, the United States may well find it worthwhile to join the proposed monetary union....