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The Globe and Mail
Tuesday, September 25, 2007

With the loonie and greenback now equal, will a monetary union soon follow? Common currency enthusiasts may hope so, but the political prospects for a single money in North America are in fact dimmer than ever. Parity brings the two countries' currencies closer together, but a monetary marriage is not on the horizon.

The idea of North American monetary union splashed on to the Canadian public agenda in 1999 in very different circumstances. The loonie's collapse in value below 65 cents (U.S.) at that time generated a sense of crisis in the country.

Under such circumstances, some prominent economists suggested the country might be better served by adopting the U.S. dollar (or perhaps even a kind of new North American currency). Canadians would have a more stable money and cross-border commerce would no longer be affected by currency volatility.

These arguments attracted some support across the country, including among Quebec sovereigntists who hoped monetary union might also provide a more solid guarantee to Quebec voters that the path to the province's independence would not be accompanied by monetary instability.

Fast forward to 2007. The loonie's rapid appreciation to parity has revived arguments about the economic costs associated with a floating exchange rate. But a number of other economic and political developments have undermined the monetary union cause.

In 1999, many Canadians were attracted to the idea of replacing their weak currency for the all-powerful stable U.S. dollar. Now, the tables are turned. While the loonie rides high, the U.S. currency is plunging in value against the world's major currencies.

The unprecedented size of both the U.S. external debt and current account deficit is eroding confidence in the greenback. It would be a tall task to convince Canadians to adopt the U.S. currency when investors and governments are re-evaluating their reliance on the U.S. dollar as an international currency.

Adopting the U.S. dollar would also involve tying Canada to U.S. monetary policy preferences. In 1999, advocates saw this in a positive light, arguing that the U.S. central bank was more likely to preserve price stability.

That argument was contested at the time, given the Bank of Canada's monetary record over the previous decade. It is even less convincing today when the U.S. faces a serious subprime mortgage crisis and large fiscal deficits at the federal government level.

As the U.S. economy moves in a different direction, the floating rate allows Canada to pursue an independent monetary policy geared to the needs of our economy. The desire to insulate Canada from inflationary pressures south of the border provided the central rationale for introducing the current floating rate regime in 1970 (as well as in 1950).

In the absence of a floating exchange rate, the Canadian economy would also need to adjust to external economic changes in some other manner. One alternative mechanism used by countries within the European monetary union is to allow people to move between member states.

During the earlier debate, prominent Canadian analysts suggested they would be more supportive of monetary union if freer movement of people between Canada and United States could serve the same role. But the tightening border restrictions in the wake of Sept. 11, 2001, forced the recognition that this was no longer a realistic option.

Two other political phenomena have further undermined the prospects for North American monetary union. The first is the waning political influence of one of its central champions within the Canadian polity: the Quebec sovereigntist movement.

The other has been the political reaction to the loonie's appreciation to parity. Some advocates back in 1999 had hoped that a future appreciation of the currency would generate support for their cause, particularly among the business community.

The recent upward movement of the currency has certainly wreaked havoc in many sectors of the economy. But the economic dislocation does not appear to be generating a new wave of support for monetary union. Most opponents of the dollar's appreciation have been calling for a reversal of the currency's movement rather than monetary union.

It is also noteworthy that the appreciation between 2002 and 2007 - despite its unprecedented magnitude in the postwar period - has generated less political controversy than past moments when the currency reached high levels such as the late 1980s, the early 1970s or the late 1950s.

One explanation may be that it has occurred during a period of strong growth. In addition, many Canadian businesses have become more import-dependent, making their exchange rate interests more complicated.

Perhaps the most striking political response to the loonie's appreciation came last week when the currency hit parity with the U.S. dollar. This moment was met in many quarters with an unusual outpouring of pride in the national currency.

Far from being a harbinger of a monetary union, the loonie's new equality with the greenback has thus raised yet one more political obstacle in the way of such a project. The Canadian dollar appears to have suddenly become a potent symbol of nationalism in a country where such symbols are few and far between.


About the Author

Eric Helleiner, former CIGI Chair in International Political Economy

The opinions expressed in this article/comments are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors and/or International Board of Governors.