North American currency union: The next euro flop
Published: Thursday, April 19, 2012
Updated: Wednesday, April 18, 2012 19:04
The idea of combining the currencies of the three North American countries, namely Canada, the United States, and Mexico, has been entertained by various parties following the launch of the euro in Jan. 1999, but nothing ever became of it because many thought it was impractical for the continent at the time.
But now that stories of how the euro is about to fail have began to circulate, coupled with the declining influence of the U.S. dollar, many economists are juggling with the concept again.
Although no one is seriously considering combining the currencies, for the purposes of debate, let’s discuss why it would be a bad idea.
The new currency, referred to as the amero, was first proposed by Herbert Grubel, a former Canadian politician and now emeritus professor of economics at the Simon Fraser University in Vancouver, in a research study he wrote for the Canadian public policy think tank Fraser Institute in Sept. 1999.
Titled “The Case of the Amero,” Grubel argued primarily from Canada’s standpoint. At the time of his study, he feared the newly launched euro would become so successful that it will replace the U.S. dollar’s usage in many parts of the world. He believed by introducing the amero, the risks associated with currency trading in North America could be eliminated and bring about price stability for essential resources such as oil and food.
But most importantly, it would lower the interest rates the money Canada and Mexico borrowed from other countries. He admitted that although the proposal did have immediate benefits for Canada and Mexico, the U.S. wouldn’t see much improvement.
The euro was issued following the same logic. Among the 27 countries that are members of the European Union, 17 of them thought merging currencies would eliminate heavy currency conversion costs in their close-knitted trade network and establish interdependence between the countries so they can back each other up financially, according to a Time Moneyland blog post by financial analyst Michael Sivy.
But geographically speaking, North American countries are very unlike countries in Europe. European countries exist within close proximity of one another, and are often surrounded by two to four countries on each side. A product being traded across half a dozen countries over there in a single day is not surprising. That is why a common currency was more convenient for them.
North America, on the other hand, is clearly divided into three sections with the U.S. separating the Canadian and Mexican borders. We already have the North American Free Trade Agreement in place to ensure tariff-free trading as a way to stimulate investments. Therefore, having the amero would not do us much good.
Besides, having a central monetary policy will only become a burden when problems arise. Just take a look at the situation in Greece right now. In the past, its solution to debts and other financial problem was to print more drachmas. But now that they belong to the euro-zone, the EU cannot print more euros just for them. So instead, they are being asked to make drastic cuts to their budgets, according to an CNN.
Same thing for North America. If one of the countries happen to fall into financial crisis while the other two are not in shape to help, the whole union will get dragged down.
Seriously. If we ever get to vote on combining North America’s currency, don’t do it. It will just end in a nasty breakup eventually.