THE AMERO: GOOD, BAD OR UGLY?
THOUGHTS ON A POTENTIAL CURRENCY FOR NORTH
AMERICA
By Kent Edward Baxter
OVERVIEW
In this age of globalization, free trade and increased communication between nations and continents, national borders are fast diminishing in their relevance. Clearly, in modern times, there is more for a country to gain by interacting and dealing with other nations than being inward looking or preferential. What a nation does not take notice of is their loss, especially when it may be a benefit, or lead to benefits.
If any nation has been thought to be the very model of unofficial integration, whether economic or cultural, it is Canada. With its 'branch-plant' economy, Free Trade, American businesses with the most prominent being retailing, and a familiarity with American culture, a common currency with the United States would be the literal kitchen sink in the Americanization of Canada which has been on the increase since the end of the Second World War.
The Free Trade agreement (FTA), which encompasses Canada and The United States, and The North American Free Trade Agreement (NAFTA), which includes Mexico, has created a semi-common market that is in some ways, similar to the European Community. In that sense, a single currency, after a period of time of usage in Europe, should the Euro prove to be successful, may pave the way for a single currency for North America, known as the Amero.
FISCAL POLICY
A continental-wide currency for North America could mean a greater [theoretical] money supply for Canada, with an increase in investment. The federal government may be able to afford to pay equalization payments to provinces with the influx of revenue.
Should revenue increase, taxation may be
decreased due to a large tax base. What would make taxation
common among the Amero nations would be the introduction of tax
rules in a semi-market. This may not be easy to implement,
however, since fiscal policies vary in Canada, The United States,
and Mexico. In addition, the three nations differ in terms of
social conditions. Canada, being a welfare state, relies on
taxation dollars to fund social programs, and to the same extent,
so does Mexico. A common standard of taxation initiated in the
United States may be seen from the viewpoint of Canada and Mexico
as being
to the advantage of the United States, not necessarily for their
own countries.
Government or economic theory alone cannot implement a continentally shared economy. In addition to currency and taxation standards, an important factor to consider that may differ in each country is the standard of working conditions. Labour laws may vary, as well as trade union influence. Labour, being the backbone of any economy, should be taken into consideration, as the implementation of new economic standards on a nation may have a severe effect on labour conditions, should they be different than the status that a nation is used to, and has had to work hard to achieve.
Overall, differences in the spending of
revenue collected will not necessarily change from country to
country, since each is unique in its priorities. What are
important, are the ease to which it can be collected, and whether
the value of the currency will effect the performance of the
economy.
MONETARY POLICY
Introducing a common currency to Canada and Mexico will result in those countries having to rescind their present monetary policies to those used by the United states, or one that is settled on in negotiations. It will not be an easy task, since no two are alike, the most potent being that of Mexico, which, with its low-value currency, has had to seek a great deal of foreign investment to keep the country afloat.
With a single currency, national banks such as the Bank of Canada and the American Federal Reserve Bank will be abolished, in favour of a centralized bank for the whole currency market, most likely to be based in the United States. As in Europe, a consideration will have to be made in terms of how much representation that a participating nation will have on the boards of centralized banks or agencies, in terms of fairness, and to avoid the impression that one nation is dominant in determining monetary policies.
By becoming involved in a currency
market, a nation will have to devote time and energy to properly
manage its economy in order to encourage confidence in the new
currency, and avoid taking the blame by other members of the
currency market when there is a downfall. Once a nation devotes
itself to a common currency market, there is no turning back.
FIXED VERSUS FLOATING EXCHANGE RATES
Pegging the value of the Canadian dollar on to the American Dollar is a logical choice, since it is the world's top currency. From an economic standpoint, it allows Canada to see how the value of its dollar compares to that of other nations. The last half-decade has shown, in relative terms that basing one's currency on the American currency, with a booming American economy, can allow a nation to reap benefits.
When a currency is pegged on to another currency, it may theoretically have the advantage of being strong in times when the nations own economy is weak, as the nation to which it is pegged is doing reasonably well.
Allowing a currency to float reduces the risk of a nation's own currency suffering when the currency to which it is pegged suffers in value. Overall, floating allows the value of a currency to be determined by factors surrounding the nation, not by the economic problems of another country, especially one that may be so much more powerful.
A floating currency policy, however, means that the currency will always be volatile, effects showing from all elements in the economy, good or bad. Depending on the economy, whether it is good or bad, the currency's value could go up or down by large extremes. An unstable currency can be a deterrent to foreign investment, as large-scale investors could lose out when there is a severe downturn, and face a shortfall if there is an upturn.
A currency should be set as and thought of as
strong, so that foreign investors will be confident in both the
currency and the economy, and reduce fears of taking a large
risk, as well, the government will be confident in its dealings,
not feeling like a weak partner, and be able to prove themselves
to be worthwhile.
INTERNAL AND EXTERNAL BALANCE
The decline in value of the Canadian dollar has had a lopsided effect on the purchasing value of Canada and the United States, mainly an increase for the U.S and a decrease for Canada. In terms of trade, foreign corporations seeking to establish operations in North America have the option of choosing which country they would like as the basis for their operations, as a central economy and currency would theoretically provide the approximate same benefits and results no matter where [sic] on the continent it would be based.
The adoption by Mexico of the American currency could very well result in a disadvantage for the U.S, which has over the years used the perpetually depressed Peso to its advantage, in terms of cheap labour and the availability of raw materials at low costs. Should the Amero go into effect, Mexico may face two situations in terms of trade and investment by Americans. A positive aspect would be, if investment continues at the same rate under the new currency, the economy will flourish, yet if American investors reduce investment due to increased costs, the economyˇ¦s strength will either remain the same or fall if the cut is severe enough, based on policies shaped to deal with the Mexican currency.
Canada, which has had mostly American investment, may be able to have Canadian companies invest more in the United States and Mexico with a strong common currency. There is more then ever a potential for a greater Canadian presence in the United States and Mexican economy should the Amero succeed. Another consideration is that Mexico may have the opportunity to expand its industries into other countries, a further breakthrough from the past.
Besides a possibility for more trade between Canada and the United States, the Amero may result in inter-provincial trade barriers (as well as some inter-state barriers in the United States) being abolished. This may allow for more goods to be sold within Canada than ever before, since there will be a greater demand, and an obligation to satisfy that demand.
POLITICS AND ECONOMICS
Those who oppose a single North American currency are doing so for various reasons, mainly to preserve sovereignty, for skepticism that it will not meet its potential, massive readjustments to monetary and fiscal policy, and the possibility that value of the currency may fall, harming the Canadian economy.
While the federal Liberal government has opposed the adoption of a single currency, the position may very well change a few years down the line if support increases due to the continued success of the American dollar. Opinions do change, although the Liberal party [under the leadership of John Turner] opposed Free Trade in 1988 on the grounds that it was a threat to Canadian sovereignty, Prime Minister Jean Chretien endorsed it once Canada began to benefit from a revitalized American Economy.
In regards to the above, it should be mentioned that in the Liberal Party 1993 Red Book, one promise was to 'Scrap NAFTA'.. The promise was never fulfilled, due to an economic improvement that began not too long after the Liberals were in office. Economics played a key part in policy change, not politics.
Although it may not be good politics to break promises, it works in well with a quote from economist John Meynard Keynes - 'When I discover that I am wrong, I change my mind. What do you do?' Needless to say, there was little backlash against the Liberals in the 1997 election on the [Free Trade] issue, since most Canadians who voted Liberal voted with their pocketbooks, a confirmation that Canadians are reaping the benefits of both trade deals.
Politics may come into light by the protests of various groups over regulations and decisions made by trade organizations, which are inevitable. Leadership by those nations must be clearly provided for issues in their own best interest, not just for the market as a whole.
BIBLIOGRAPHY
Time to Tame Exchange Rates by David Malpass,
The Wall Street Journal, Friday
3 December 1999
Broken Borders of the Nation State by Philip Stephens
Euro Slides Toward Parity with U.S. Dollar by
Paul Bagnell, Financial Post,
Saturday 27 November 1999
The lowdown on the Euro: Red faces all around
as Europe's currency falls like a brick
By Christopher Fildes, The Daily Telegraph, Thursday 2 December
1999
Euro gives up 15% to reach par with dollar by
Stephen Miles, Financial Post,
Friday 3 December 1999