No recent public policy controversy has stirred such emotion as the debate over merging the currencies of Canada and the United States.
The visceral and negative reaction to the idea offers further proof that a Canadian identity does exist, however elusive its precise definition may be. For millions of people, the sense of belonging to a country is expressed through national symbols like national currencies. While ostensibly committed to the European Union, a majority of Brits and Germans continues to oppose the sublimation of the Pound and the Mark into the unfamiliar, transnational Euro.
Should we put our fears aside and jump into a North American currency union?
The C. D. Howe Institute provoked the debate late in June when it released a paper calling for consideration of the idea. The Toronto think tank’s argument goes something like this: Increased integration of the U.S., Canadian and other western hemisphere economies into one transnational economy as a consequence of freer trade has brought "market dollarization" closer. If that were actually to come about, businesses would no longer conduct their affairs in their own national currencies; they would, instead, operate bank accounts, set prices and even pay their employees in U.S. dollars. This would start any country where it occurred down a "slippery slope", making exchange rates more volatile and diminishing the central bank’s ability to control monetary policy. For Canada, an official currency union would allow us to manage this de facto slide to the U.S. dollar and ameliorate the subsequent erosion of our financial and regulatory institutions.
That sounds abstract, but it’s based on concrete facts. Since 1988, when the North American Free Trade Agreement (NAFTA) was signed, Canada’s volume of trade with the United States has almost tripled. Interprovincial trade within Canada has also increased, but at a much slower pace. In other words, NAFTA has allowed the U.S. and Canadian economies to integrate along natural lines that reflect real trading interests rather than artificial political constructs like the 49th parallel. We now ship 85% of our exports to the American market.
This bias is not just the result of trading freedom. It is also a function of the perennially weak Canadian dollar, which has lost a third of its international value since exchange rates started floating in 1971. The value of our money now consists entirely in the subjective judgements made by millions of traders whenever they buy and sell. Canada’s high tax rates, intrusive regulatory regimes and labour market distortions all play a part in these judgements. We have little real power left to influence them in our favour; our gold supply, which just 18 years ago made up 80% of our foreign currency reserves, now makes up only 5%. The value of our currency now relies entirely on the not-so-tender mercies of international opinion.
That sounds dangerous, but it has forced Ottawa to face reality. The free spending and accumulation of debt indulged in by governments of all stripes over the last generation are no longer options. We balanced our budgets because our economy would have gone down the drain if we hadn’t. The loss of sovereignty represented by a currency union means a continuation of this powerful trend: the transfer of power to markets composed of billions of buyers and sellers further constricts and restrains the behaviour of the traditional political classes.
A currency union with the United States would, as its critics claim, erode our political power to interfere in markets. It would also consolidate and extend the productivity gains we’ve achieved under NAFTA and make our private sector more competitive. It would force us to cut taxes and adhere to spending levels closer to what we can really afford.