A Common Currency for the Americas?

by Roy Culpeper
President, North-South Institute
March 15, 2001

(Ppublished by the Globe and Mail, under the title "Beware of the almighty dollar", March 23rd, 2001)

As Finance Ministers of the Western Hemisphere meet in Toronto in early April to discuss economic conditions and future investment climates in the lead-up to the Summit of the Americas in Quebec City, some may ponder the idea of a common currency. If negotiations on a hemispheric free trade agreement go ahead after the Summit, why not broaden the agenda to include a common currency for the region?

There are several good reasons why a hemispheric common currency – let’s call it, for the sake of argument, the ‘Amero’ – is a bad idea. The disadvantages to Canada, and the countries of Latin America, of giving up their national currencies far outweigh the potential benefits.

Proponents of the ‘Amero’ argue that the Europeans have shown us the way. After eradicating all other barriers to the movement of goods across borders, they merged their national currencies to form the Euro. As a result of currency union, trade and investment among members of the European Monetary Union isbexpected to grow by leaps and bounds.

The problem with this argument is that the Americas are radically different from Europe. Germany has the biggest economy in Europe. But, Germany’s GDP is less than that of France and Italy combined. In contrast, the economy of the United States is three times as large as that of Canada, Latin America and the Caribbean combined. In the European Monetary Union, Germany is the first among equals, but is nonetheless a minority shareholder. In the Americas, the preponderance of the United States is such that it has no equals and will not have any in the foreseeable future.

Moreover, the Euro is a new currency created by Europeans who agreed to abolish their national currencies and establish a new European Central Bank. The management of the Euro and the ECB is based on agreed principles and involves the collective participation of all its members. In the Americas, the only conceivable arrangement acceptable to the United States would be an extension of the Federal Reserve System (the US central bank) to the rest of the hemisphere. Canada, for example, might become the 13th Federal Reserve District (and the Bank of Canada would morph into the ‘Federal Reserve Bank of Ottawa’). Power over the Federal Reserve System would continue to be tightly controlled from Washington, under its Board of Governors and its Chairman (currently Alan Greenspan), all of whom are appointed by the US President.

Under this scenario, there would be no new common currency like the Euro. The US dollar would, in effect, be the ‘Amero’. Monetary policy, which affects interest rate levels and availability of credit, would be determined in Washington by the Federal Reserve Board, primarily in response to US economic conditions and policy objectives. The Federal Reserve Bank of Ottawa would be reduced to writing reports on the distressed conditions facing farmers in Saskatchewan. Similarly, a Federal Reserve Bank of Buenos Aires might focus on the high unemployment rate among Argentine workers. Both would vainly hope that Washington pays attention.

An even likelier scenario than the international expansion of the Federal Reserve System is the unilateral adoption of the US dollar by countries such as Ecuador and El Salvador. However, both former Treasury Secretary Larry Summers and Alan Greenspan have made it clear that countries adopting the US dollar should not expect the Federal Reserve to change its policies by responding to their particular financial or economic needs.

Some Canadians and Latin Americans may nonetheless feel that unilateral dollarization (never mind the ‘Amero’) would make them more prosperous. They should pause to think. Argentina, a country which has, in effect, dollarized (by backstopping every peso in circulation with a US dollar), has just been set back by another economic crisis and required a US$40 billion bailout led by the International Monetary Fund. Obviously, a very hard peg to the US dollar is no guarantee of prosperity. The three countries that have unilaterally dollarized (Argentina, Ecuador and Panama) are hardly models for the rest of the hemisphere.

The host of the upcoming Summit, Prime Minister Chrétien, is a staunch defender of the Canadian dollar, and is unlikely to permit any talk of currency regimes in Québec, at least not publicly. This is unfortunate. Canada should promote the virtues of monetary independence to its Latin American neighbours. We have benefited from interest rates lower than those in the US and a flexible exchange rate has helped to bring unemployment levels down appreciably. These benefits need to be broadcast, and compared to the costs of the only other alternative – having the US dollar as the sole legal tender for the Americas.

If our Latin American neighbours were aware of how an independent monetary policy has benefited our people, their collective response might well be: “Amero, no te quiero!”.