North American Currency Union for Canada

Although fluctuations are often expected in a floating currency regime, the long term trend that has been witnessed with the Canadian dollar is nonetheless a continual depreciation. Highly volatile exchange rates diminish the informational value of Canadian prices and often lead to a distortion in the value of Canadian assets. From that, the persistent decrease in the value of the Canadian dollar has caused a reduction in the international value of Canadian assets in the global market making foreign direct investment less attractive within the Canadian borders. As Canadian assets lose their value relative to the actual international worth, Canadian firms become increasingly vulnerable to takeovers by foreign corporations. As a result, the capacity of Canadian firms to purchase capital goods and machinery from abroad is reduced which eventually creates a productivity growth that is much slower than the potential growth rate. Since the beginning of globalization, financial assets have been conventionally traded in the reserve currency of the region in which the trading is taking place. For North America, this currency would clearly be the U.S. dollar. Thus, the U.S. dollar being the unit of account of any transactions causes any assets that are dominated in the Canadian dollar to be progressively in jeopardy of currency exchange rate fluctuations and shocks.

The movement towards an increasingly globalized market has led Canada to slowly approach a human-capital based economy. As Canada historically relied mostly on natural resources as a source of its exports, it is now however gradually shifting towards a massive amount of activities that are in need of highly skilled labourers instead. As time progresses, the main goal of Canada would emphasize on the retention and development of skilled human capital that is needed for a promising technical market. A volatile and misaligned Canadian currency rate would only increase the difficulty of developing such a human capital base as workers are naturally attracted to areas that offer a relatively higher income. As the Canadian dollar continues to depreciate against the American dollar over time, the outflow of the desired skilled labour to the United States will be both witnessed and inevitable. Although the fluctuation in the value of the dollar is temporary as the currency regime is based on a flexible exchange rate, many may seem to be under the impression and belief that the decrease in the value of the Canadian dollar will, in the long run, become permanent. If a more predictable exchange rate is promoted, firms will be able to set wages and salaries in Canada more conveniently in comparison to those offered in the United States. This will allow both firms to assess their costs of operating and workers to calculate opportunity costs of working overseas without having to forecast and anticipate any upcoming changes in the currency rate. If the flexible regime continues to drive the currency rate, the volatility will unavoidably push longer term investments overseas to the United States, particularly the outflow of the very highly skilled. These movements of investments and labour will ultimately become irreversible and greatly impact Canada's ability to establish a strong and competitive comparative advantage against the United States. As a result, Canada's economic growth and political strength on the global level will deteriorate as prospects for employment opportunities are hampered. Thus, the establishment of NAMU to initiate a fixed exchange rate between Canada and the United States is crucial to the long term well being of Canada.

It is also advantageous to consider the member countries in which Canada is forming NAMU with. It will only work to Canada's benefit to be sharing a common currency with the United States, the world's leading nation in both the economic and political aspect. As Canada foregoes its national currency and joins NAMU, it is very likely that it will be granted a significant voice in the central bank that governs the new common currency. To be a part of the Federal Reserve that exercises power over this dominating currency, the strengthening of Canada's global political power will be indisputably witnessed. With the establishment of a monetary union, the member countries must also develop common monetary policies that are implemented against foreign countries. With Canada sharing the same economic policies as the world's dominating country, prosperity and growth most certainly present themselves to be the long run accomplishments. The new currency that arises from NAMU will become increasingly competitive in the global market against the Euro as the Euro is currently posing an increasing threat to the rest of the world's currencies. Moreover, in comparison to EMU where each member country has one of twelve share of the vote, Canada will have one third of voting power amongst the members of NAMU.

It is often critiqued that abandoning the national currency to pursue a monetary union will abolish the country's national sovereignty and thus lose the nation's identity. The time in which the effects of NAMU will implement and take place is very long time coming given the political sensitivities of the different countries involved. The extent of this monetary integration remains ambiguous until the actual common currency takes in effect. By then, it is possible that Canada have already lost its national sovereignty and currency autonomy with no way back. Furthermore, the question remains about whether NAMU will possibly turn into simply American Monetary Union if South America joins the currency union as well. This is yet another situation in which the aftermath of the monetary union will weaken Canada's global and political strength as Canada loses its power to have any say within this world dominating American Currency Union. Nonetheless, a possible solution to the worries of national sovereignty loss would be if Canada negotiated a seigniorage with NAMU based on either shares of population or gross domestic productii. According to Michael Chriszt, the analyst at the Federal Reserve Bank of Atlanta, seigniorage is "the revenue governments gain by issuing currency and is an important benefit of issuing one's own currency. Net seigniorage is the difference between the cost of putting money into circulation and the value of goods the money will buy."iii It is very likely that Canada will gain more revenue under this policy against having monetary autonomy because the U.S. dollar is ample across the global market and continues to grow. By having a share of the dominating currency, it will benefit Canada in the long run as the dollar continues to act as the means of payment and store of value.

It is apparent that the formation of the European Monetary Union (EMU) has led the twelve member countries to greater prosperity and proficiency. However, it is critical to note that these successes from EMU cannot be compared to the potential achievements of NAMU because the grounds and foundation for which the monetary union is established on are concerned with completely different political and economic systems. ivThe intention and aim of the establishment of EMU is likely not to correspond to that of NAMU because issues and constraints such as democratic governments, capitalist markets, and existing trade relationships limit the extent to which NAMU can mimic EMU. Although one must remain analytical and unbiased when comparing the successes of EMU and the potential accomplishments of NAMU, there are certain aspects of the North American integration that is inevitably superior to those of EMU. It has been previously discussed that NAMU can be a very long time coming due to the adjustments and adaption needed by both the government and the market in Canada. However, it is without a doubt that for Canada, these switch-over costs are likely to be lower than for the countries that joined EMU since most Canadians are familiar with the U.S. dollar already from our existing trade relationship. Additionally, NAMU would either involve the replacement of two currencies by a common currency or simply the dollarization of every member country of the monetary union. Either of the two aforementioned methods would yield a transaction cost that is evidently lower than EMU's exercise of abolishing eleven national currencies to be replaced by a sole unit of exchange.

This essay addressed the question of whether it would be beneficial for Canada to join a North American Currency Union and the evidence presented in various arguments throughout the paper has claimed that NAMU does in fact interest Canada's well being. It proved this by arguing that a fixed exchange rate between the U.S. and Canada would offer firms that operate in North America with a more stable and predictable cost structure while also retaining more of the highly skilled labour in Canada rather than allowing them to outflow to the United States. The reduction in the volatility of the currency exchange rate can also maintain the international value of Canadian assets in the global market while the new common currency will help strengthen Canada's political power globally.

The costs that the Canadian economy will incur from continuing with a flexible exchange rate will progressively warrant our attention. The next immediate step for the member countries of NAFTA should be to discuss the realistic possibilities of establishing NAMU, whether it is forming a new currency to take over North America or simply the adoption of the dollar as the unit of account. It is inevitable that the United States would have more concerning issues with both the political and the economic aspect of the creation of NAMU. The surrender of the Canadian monetary autonomy to form NAMU with the world's governing nation will undoubtedly bring upon future prosperity that the country will rarely attain with its single currency.

ENDNOTES

i Richard G. Harris, "The NAMU Debate," Canadian Public Policy Volume 25 No. 3 (1999): 321.

ii William H. Buiter, "The EMU and the NAMU: What is the Case for North American Monetary Union," Canadian Public Policy Volume 25 No. 3 (1999): 290.

iii Michael Chriszt, "Perspectives on a Potential North American Monetary Union," Federal Reserve Bank of Atlanta: Economic Review (2000): 32.

iv Eric Helleiner, Towards North American Monetary Union? The Politics and History of Canada's Exchange Rate Regime (Montreal: McGill-Queen's University Press, 2006) 241.