A North American common currency?

Once a week on our national newscast, we do a segment called “Ask Us”. It is usually the last item that airs on Friday night’s newscast. The idea is pretty simple — viewers send in their questions, on any topic at all, and we assign the question to a reporter or to a member of our crack research staff. It was my turn last week and I was assigned the following question, put to us by a viewer in Montreal.  He wrote:

I have been living for a while in Europe and personally, I had a very good experience of the unified European money Euro. I observe that there’s a very tight commercial liaison between Canada and US. Why don’t the governments of these two countries attempt to combine their currencies as well, in order to have for example the “North American Dollar NAD” instead of USD & CAD? What would be the consequence of this change?

As it turned out, I had the answer to this one close at hand. Earlier this year, I had filed an “Access to Information” request to get the “House Cards” for the Minister of Finance. “House Cards” are daily documents prepared by most government departments for their ministers. They’re often used by ministers in the House of Commons during Question Period. Ministry staff take a look at the day’s news headlines and prepare a few of these “House Cards” on whatever seems to be the hot topic of the day. The “House Cards” typically contain some background on a given issue and then give a minister a few talking points on a particular issue.

Finance Minister Jim Flaherty had just such a “House Card” prepared for him last spring that addressed the issue of a North American Common Currency. I used much of the information in that document to prepare my answer in last night’s newscast. Here, though, for those wishing a more fulsome answer, is the entire “House Card” Flaherty would have seen on the issue of a North American Common Currency. The author is Department of Finance employee:

NORTH AMERICAN COMMON CURRENCY

ISSUE

Bloc Quebecois Leader Gilles Duceppe thinks Canadians should be talking about adopting a common currency in the Americas as a means of protecting vulnerable, export-oriented companies. What is your position on this issue?

KEY POINTS

• The adoption of a common North American currency is not desirable for Canada.
• Significant differences in the industrial structure of Canada and the U.S. make the added flexibility of a floating exchange rate for the Canadian dollar very valuable from an economic standpoint.
• A North American common currency would undoubtedly mean for Canada the adoption of the U.S. dollar and U.S. monetary policy. Canada would have to give up its control on domestic inflation and interest rates.
• Alternatives that Canada could achieve on its own, such as a fixed exchange rate or dollarization, are inferior to both a common currency and our current floating exchange rate.

BACKGROUND

ALTERNATIVE EXCHANGE RATE REGIMES FOR CANADA

• A. MONETARY UNION BETWEEN CANADA AND THE U.S.
• Proponents argue that this would:
• Eliminate foreign exchange transaction costs.
• Eliminate uncertainty about the exchange rate and its possible effect on international trade and investment flows.
• Eliminate the currency risk premium on domestic debt instruments
• Some analysts have suggested a system where all three North American national central banks are retained, but join in a cooperative agreement to pursue a common set of goals with respect to inflation and financial stability, consistent with a common currency zone. Under this agreement all the central banks would keep their share of seigniorage revenue and would still have the lender-of-last resort responsibilities.
• However detractors argue:
• Canada would no longer have an independent monetary policy, as it does with a floating exchange rate (although Canada might still have a voice in monetary policy decisions, proportional to its economic size).
• Exchange rate adjustments could no longer buffer the Canadian economy from shocks with differential impacts on Canada and the US., such as an increase in commodity prices.
• Lengthy and costly negotiations would be required to reach agreement on a wide range of difficult and complex issues (such as lender of last resort facilities and sharing the seignorage revenues). The feasibility of this option depends on the willingness of Canada to cede monetary independence, and an assessment by the U.S. that such an arrangement would be
  beneficial to them.
• The absence of a North American political framework currently blocks implementation of a common currency. Without such institutions, the transfer of national sovereignty to a single, supranational central bank lacks political legitimacy.
• B. DOLLARIZATION
• Would be implemented unilaterally by Canada. Detractors note the additional drawbacks:
• Canada would have no influence on monetary policy.
• The Bank of Canada would lose its lender of last resort facilities.
• The Canadian government would lose seignorage revenue (about $1.5 billion annually).
• C. CURRENCY BOARD
• Detractors note an additional drawback: A Central Bank would be vulnerable to a speculative attack, if the domestic economic costs of maintaining the currency board are perceived as becoming too high.
• D. FIXED EXCHANGE RATE TO THE U.S. DOLLAR
• Detractors note an additional drawback: This involves less of a commitment by the authorities than a currency board. As such, a fixed rate is less credible and more vulnerable to speculative attacks.