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Time to trade-in Canada's loonie?

The launch of the euro has reawakened Canadian debate about a commoncurrency with the US.

By Ruth WalkerStaff writer of The Christian Science Monitor / January 12, 1999



TORONTO

Does North America need a superdollar to hold its own against the euro? The evidently successful launch this month of the new European currency, the euro, has sparked a modest revival of Canadian interest in a North American currency union. "It's worth considering, or at least fixed exchange rates," says Tom Courchene, an economist at Queen's University in Kingston, Ontario. His concern is that the present system of floating exchange rates between the Canadian and United States dollars doesn't reflect well the close integration between the two economies. Downside of floating rates Exchange-rate volatility makes it hard for businesses to locate in Canada, Professor Courchene suggests. "If I locate a plant in Canada to serve the North American market when the [Canadian] dollar is 66 [US] cents, and then it goes to 75 cents, I'm going to wish I'd stayed in Michigan." John McCallum, chief economist at the Royal Bank of Canada in Toronto, agrees that floating exchange rates cause problems. "It's the worst system in the world - apart from all the others," he says, paraphrasing Winston Churchill's famous quip about democracy. He acknowledges that business planning would be easier without currency fluctuations. But floating exchange rates are a useful safety valve, he says, when falling commodity prices push down the value of the loonie, as the Canadian dollar is familiarly known because of the loon pictured on the $1 coin. That's what happened last year. The Asian economic collapse meant falling prices for Canadian timber and other products. The loonie spent much of last year in dive mode. In fact, for the first time in its 140-year history, the Canadian dollar's value fell to less than two-thirds of the US dollar. The US and Canadian economies are closely integrated, but proportionately, Canada has a much bigger resource sector - although it's on the decline in terms of relative importance. "Forty percent of our exports are resource-based," says Mr. McCallum. "That's down from 80 percent 25 years ago. Is the glass half empty or half full?" Sides of the debate The Bank of Canada, the country's central bank, has long held the view that a common currency with the US would hurt more than it would help, even were it politically feasible. The bank even doubts the benefits of a common currency among Europeans. A 1997 paper published by the Bank of Canada said such a union, though helpful on some levels, would make many European countries vulnerable to external economic shocks, points out the London-based Financial Times. But for advocates of exchange-rate fixity like Courchene, what has worked for the Canadian economy in the past may not be the best for what the country is becoming. "The future is in the rising importance of human capital," he says. In his view, fixed exchange rates are desirable for human-capital-intensive industries such as software development. He worries that without some control on exchange-rate volatility, Ontario in particular will not be able to make the most of its economic opportunities in the heart of a vast North American market. And if a currency union were formed, what would be in it for the US? As the euro takes hold in Europe, Courchene says, even countries not yet part of the European Union may link currencies to the euro. "The de facto euro zone will be twice the size of the dollar zone," says Courchene. The size of Canada's economy may be only a small fraction of that of the US, but it could still help the US counterbalance Europe as an attractive investment. The loonie seems to be benefiting from increased investment by those who earlier were speculating on fluctuations among currencies now part of the euro zone. What Canada might sacrifice For the first time since September, the loonie closed above 66 US cents last week. And in other good news, Canada enjoyed its strongest employment growth and lowest jobless rate in almost a decade last year. If Canada stands to gain more from a currency union than the US, Canada would also likely have to sacrifice more to achieve it. Harmonizing economic policies, as a common currency would require, is hard enough, as Europeans have been finding out. It could be even harder for Canada, a country that sees its national identity in having more generous social benefits and higher tax rates than its American neighbors. "Guess who would harmonize to whom?" McCallum suggests rhetorically. Moreover, the political context for the European currency union is very different. Not like the euro The euro is an economic policy in pursuit of a political goal: integrating the economies of Europe so completely that war among them would become unthinkable. If currency union constrains national sovereignty in Europe, well, that is exactly the point of the exercise. But on this side of the Atlantic, "I don't think it's on our agenda to become a united North America," says McCallum. Yet with nearly two centuries of largely peaceful relations across one of the longest borders in the world, in part due to economic integration, Canada and the US have arguably achieved what the Europeans are trying to ensure.

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