Monetary union of canadian and us dollar Essay

Monetary union of canadian and us dollar

 

 

 

I.      Introduction

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Since the gigantic and bold move by Europe in January 1999 to unite its currencies, the rippling effects towards other economies are being felt. Much talk and more debates have been circulating whether to adapt the same policy, often with other neighboring countries. Even some Asian countries are also considering merging their currencies in their bid to strengthen their economy against their western counterparts.

It is not surprising then that a lot of speculation and contemplation are going on whether Canada and the United States will follow through. Economic experts give various opinions of what monetary union is, thereby sparking strong public debates between those in favor and those against it. Many though are still confused as to what the unification would entail.

Basically, monetary union between two or more currencies would bring about the formation of a new currency that shall be adapted by participating countries. As the European Union created the “euro”, it has been proposed by Herbert Grubel that an “amero” be also adapted by Canada and the United States to replace its current dollars (H. Grubel. “Does the Global Economy Need a Global Currency?”)

Such proposal however, may be unlikely to happen given the strong sentiments that Americans display for their dollar. Americans are known to be proud of their heritage and for Americans to be asked to give up on their own currency would tantamount to giving up on one of its national identity. An “amero” then, at the present, is close to impossibility.

Another option then is given in which one of the two currencies will dissolve in favor of the other. In this case, through the process of “dollarisation”, Canada will assume the US dollar. This will not be the first, if such an option comes about, that a country accedes to the American dollar as their currency over their own. Such countries include Liberia and Panama. One important point of consideration though of dollarisation is the loss of power or rule of Canada over its own monetary policy.

Monetary union between Canada and US dollar carries various effects, both advantageous and disadvantageous to Canada’s economic welfare. Already, much speculation had been made that currency union has already been secretly implemented, along with Mexico. However, there had been no substantial evidence of the matter, and no government had admitted of any plans to form such a union.

It is also apparent that much of the debate rests not only upon this issue but on the process by which currency integration between Canada and U.S. will be achieved. Would it be through monetary union, dollarisation, fixed or flexible exchange rates? It is important that these different factors be weighed, before such a proposal be accepted or rejected.

 

 

 

II.      Advantages

Greater link between the economies of Canada and the United States have already been entrenched through the stipulations starting on the Free Trade Agreement (FTA) and which has now evolved as NAFTA. The outcome of such an agreement has further heightened trading activities over the past years.

As the volume of trading increases, a floating exchange rate becomes a visible source of inconvenience and hassle. Adopting one currency would obviously eradicate such trouble. A common currency, as proposed by those in favor, would correspond and enhance the benefits reaped through the agreements in NAFTA.

It is further argued by those in favor of a monetary union, to point out the disadvantages for Canada that is presently wrought by the current floating exchange system. For the past decade, the Canadian industry had suffered the costs due to uncertainty. In addition, costs are also being absorbed by the Canadian business sector in relation to foreign exchange transactions. The loss has approximately been calculated to reach as much as $ 3 billion every year. It is therefore quite obvious that utilizing a common currency with the US would keep Canada’s industries from wasteful expenses (“Monetary Union With the U.S.: The Pros and Cons”).

At the beginning of such a proposition, it is also important to note that the financial circumstance for Canadians in the past years was a comparatively depreciated dollar over America. This has brought down Canadian assets at a bargain-price, making conditions in favor of an American takeover. The loss of ownership over these enterprises would subsequently reduce Canada’s authority over its assets. In effect, this works contradictory for staunch supporters of flexible rates, who reject a monetary union, in order that Canada could continue to exercise monetary sovereignty. One cannot continue to uphold this kind of sovereignty when it has lost ownership over some of its assets in the first place.

Also, a floating exchange rate creates volatility in market prices which becomes costly. When the currency is over-valued, this stunts production growth. Companies opt to find ways for cost-cutting through downsizing and/or outsourcing. Consequently, this brings a heavy blow on the labor sector. Conversely, when there is undervaluation, production generally increases. However, when such production is heavily linked to the utilization of US based goods, an increase of production is also tantamount to an increase of operating expenses. Again, as business enterprise gears to adjust in order to maintain profit, labor costs are made relatively lower compared to their US or other foreign counterpart. This makes the local working community unattractive for retaining its skilled labor sector, which naturally are drawn to higher salaries offered abroad (T. Courchene. “A Canadian Perspective on North American Monetary Union”).

Other risks involved in a floating exchange rate are the high interest rates on debt. A fixed rate on the other hand, would clear the way for greatly productivity as more investments are poured in boosted by lower interest rates.

Whether dollarisation or an “amero” is adopted, a monetary union would discourage or restrain the dumping of goods that puts a strain on Canada and US relations as prices of commodities will be easily compared. Local market would not have to suffer needlessly from cheaper goods thus promoting productivity. The majority of Canadian companies support dollarisation since most had already practiced quoting their goods and services based on the US’ dollar. Another possible advantage is the avoidance of losses caused by a transfer of funds to countries that pose as tax havens (D. Conklin and D. Robertson. “Tax Havens: Investment Distortions and Policy Options”).

Of greater felt need to merge the Canadian and US dollar is to defend it from weakening against the strengthening of the European Union’s euro. There is much fear that competitiveness of the Canadian dollar cannot withstand alone on the effects of the euro. Already, there are three existing monetary zones that Canada had to contend with namely:

·         Europe’s euro

·         US’ dollar

·         Japan’s yen

Entering a merge of currency with the United States as soon as possible would prevent Canada’s economy from being marginalized. Bonding with the United State’s economy creates a shield as the US is known to be a haven even for short-term investments; a case in point was Asia’s economic crisis. A number of investments were relocated to the U.S., thus monetary union provides a degree of stability during unstable times. It is a fact, that the United States has established a greater track record of managing or curtailing price increases compared to that of Canada.

 

III.      Disadvantages

Since a North American monetary union was proposed in 1999, as well as the recommended dollarisation, passionate opposition in Canada were raised against it. Many of those who resisted such an idea were based mainly on mistrust against American interests. They view currency union with the US as a simple ploy for Americans to get a right to use and exploit Canada’s vast natural resources.

Another detriment for monetary union is simply the seeming lack of interest by both the American and Canadian government. It would appear that there is no apparent initial benefit for the US government to forge such an agreement. The Canadian government on the other hand, strongly opposes any notion of having to give up its sovereignty over its own monetary policy (S. Chase. “Consider a Continental Currency: Jarislowsky”).

Another major draw back form a single currency mainly among Canada and Mexico’s government is the apparent domination of the United States to govern and control the union. It would highly be possible that the US government would place its own interests above the rest. Notwithstanding, the US already has the benefit of operating on a bigger economy compared with the rest of Canada or Mexico.

The American dollar already enjoys a superior position — being that of a global currency. To give-up for another currency might jeopardize the US’ dollar, shifting the benefit to the rival euro or yen. Since it is a global economy, the United States government benefits from the revenues of producing and distributing its currency. A shift to a single currency, although seignorage would still be achieved, profit would likely be distributed and shared with Canada and Mexico.

Canada’s local economy could suffer unfavorably by U.S. decisions, hampering growth for Canada’s provincial economies like Nova Scotia. A formation of a unionized currency could mean a loss of profit for the Canadian government amounting to $ 1.4 billion worth from seignorage.

 

 

IV.      Other Issues Raised

A.   Differences in Economic Policies and Conditions

As the union entails surrendering of monetary sovereignty of each respective government, several factors are being brought up which needs to be resolved:

·         The issue on differences of debt amongst the likely participating countries which directly affects the value of currency as well as the prices of its commodities

·         Unlike members of the European Union — Canada, America and Mexico have varied economies

B.   Political Mandate

The constitutionality of such a move is being questioned. Majority even among the American public resent the Bush’s administration of moving towards any agreement for a single currency, for the same reason that most Canadians felt as an intrusion to self-governance (“Lou Dobbs on the North American Union”).

Canadian media had published that the two-day meeting at Quebec between President George W. Bush, Stephen Harper and Felipe Calderon is to further put in motion the economic union of these countries. It also opposes the lack of consultation of such a major decision among its Canadian constituents (K. Parkinson. “Canadians Completely Unaware of Looming North American Union: Bush and Calderon to Visit Canada”).

At present, there is no significant democratic political body across the borders of Canada and the United States and Mexico that had truly been duly recognized and respected by its constituents. As such, a monetary union is being overwhelmed by a deluge of opposition. For as long as there is an absence of a governing body that transcends each respective government, it is highly unlikely that neither Canada nor the US government would surrender its authority over its own currency and thus would a monetary union would lack political legitimacy to be implemented. The absence of an institution by which accountability could be held dims any possibility of NAMU to be enforced, or of it surviving if, in any case, it does pushes through (“W. Buiter. “The EMU and the NAMU: What is the Case for North American Monetary Union?”).

 

 

 

V.      Mexico and Other Regions

In the advent of a monetary union between the United States and Canada, peripheral economies mainly by Mexico are positively gearing up for such a probability, especially seeing at as a step further in boosting the effect of the NAFTA.

Other countries are deeply dependent on the US economy but had attached their currency with that of the American dollar. Countries such as El Salvador and Panama had fully adopted dollarisation, including Ecuador.

Most Central American countries had already received the US dollar into the mainstream of their daily monetary exchange — using it alongside their own local currency.

For such regions, dollarisation or an amero would be to their greater advantage. This would elevate their domestic economies and provide more stability.

 

VI.      Comparisons with EU

It is inevitable that a brief comparison as to the effects that euro had to its member-states, in relation to the consideration of creating a North American counterpart of the monetary union. It is the formation of the European countries’ EU which forms as a basic model of monetary union elsewhere. Since the implementation of the euro, it has brought benefits felt by the business sectors down to individuals. As costs for doing business across borders are reduced, competition has increased and created a positive effect on pricing of services and commodities. Moreover, individuals who travel across borders such as tourists or frequent travelers who work across borders have been set free from the hassles of having to change currency and have saved money in the through the process (“Economic Policy and the Euro”).

What the EU produced was more than the creation of a single currency. Of greater emphasis should be laid on the creation of a single-market for all EU members. Trading within EU partner countries had boosted the each local economy as trading increased significantly. Companies are also presented with a wider range of workforce, which thereby develop quality production while at the same time, lowering cost of goods.

 

 

 

VII.      Conclusion

In a world that is seemingly coming smaller as it becomes a global economy, a question had been raised whether a global economy needs a common currency. The creation of an economic-monetary regime would be resolved by the satisfaction of the basic needs of any business enterprise and individuals namely, a steady economy, global competitiveness, and protection from inflation.

It is also a basic, inherent part of human nature to be generally change-resistant. People make serious considerations before adopting to change. If the same can be spoken to individuals, much more can be said of institutions and processes that had provided comfort zones. As individuals are to change, so will countries be. It is unlikely that a monetary union will be welcomed and gladly embraced by the Canadian or American public. Both nations would insist that maintaining the status quo would reap greater benefit than facing the dangers of a possible union.

Although the slow progression towards currency union is mainly seen as an American resistance for having the “upper hand” — having much more to lose and not much to gain, America’s current weakening of the dollar might bring ripples of uncertainty and just might bring them to closer contemplation and action towards single currency.

However, this could be largely considered as a leap towards the moon. As much as there are arguments that show a favorable outcome of an economic union, there also exist as much arguments that prove otherwise.

As of now, it is hardly easy to choose which proponent of each side is correct. The current debate through the exchange of opposing ideas and theories could evolve into a political one. We are already witnessing the active deliberation of such a probability through the media as well as among political and economic analysts who are either in favor or against it.

Trade openness press more countries to link closer ties through trading agreements. If theories can solely be trusted, the figures showed in Charles Wyplosz’ study had proven that monetary union had yielded greater favorable results compared with those who operate under trade agreement alone. Greater benefit had been projected by countries that decided to join currencies in addition to their trading agreement (C. Wyplosz. “Monetary and Financial Arrangements as Regional Public Goods: A European Perspective”).

For most of Canada, nationalistic sentiments are due to make a big influence on its decisions as well as how this would affect Canadian’s daily life. For certain, each side will continue to be questioned and debates are nowhere near of dying down.

 

 

 

 

 

References:

 

 

1.      Grubel, H. “Does the Global Economy Need a Global Currency?”

http://www.fraserinstitute.org/Commerce.Web/product_files/Does%20the%20Global%20Economy%20need%20a%20Global%20Currency~-0903grubel.pdf

2.      “Monetary Union With the U.S.: The Pros and Cons”.

http://dsp-psd.pwgsc.gc.ca/Collection-R/LoPBdP/EB/prb999-e.htm

3.      Courchene, T. “A Canadian Perspective on North American Monetary Union”.

http://www.irpp.org/newsroom/archive/2001/0105pape.pdf

4.      Conklin, D and Robertson, D. “Tax Havens: Investment Distortions and Policy Options”.

http://www.utpjournals.com/cpp/cpp253.html

5.      Chase, S. “Consider a Continental Currency: Jarislowsky”. The Globe and Mail. Nov. 22, 2007.

6.      “Lou Dobbs on the North American Union”

http://www.informationclearinghouse.info/article13854.htm

7.      Parkinson, K. “Canadians Completely Unaware of Looming North American Union: Bush and Calderon to Visit Canada”. Global Research. July 17, 2007

http://www.globalresearch.ca/index.php?context=va&aid=6346

8.      Buiter, W. “The EMU and the NAMU: What is the Case for North American Monetary Union?”. University of Toronto Press Journals. vol. 25, no. 3. September, 1999.

http://www.utpjournals.com/cpp/cpp253.html

9.      “Economic Policy and the Euro”.

http://www.deltwn.ec.europa.eu/modules.php?op=modload&name=News&file=article&sid=66

 

 

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