New study explains why Canada should not jump on the monetary integration bandwagon

November 21, 2002

OTTAWA--Spurred by a plummeting Canadian dollar which has been subjected to strong speculative pressures during the last decade, support has built up for greater monetary integration and even for an outright North American Monetary Union (NAMU). But a new study conducted for the Canadian Centre for Policy Alternatives (CCPA) finds that such a surrender of our monetary sovereignty would not be socially or economically beneficial for most Canadians.

"It would be far better," says the study's author, University of Ottawa economist Mario Seccareccia, "for Canada to continue to 'go it alone' under the current flexible exchange rate system."

The study--North American Monetary Integration: Should Canada Join the Dollarization Bandwagon --examines the various integrated monetary systems that have been proposed, including a hard peg to the U.S. dollar, a currency board system, and the unilateral adoption of the U.S. dollar, and concludes that none of them would help to solve the many problems now facing the country.

The study also examines alleged benefits of monetary integration, such as lower transaction costs, productivity gains and lower real interest rates, and finds them unconvincing and flawed.

Seccareccia assesses an idea popular among monetary integration proponents-a North American Monetary Union (NAMU) along European lines. "Besides surrendering political sovereignty (the European goal is political union), it is naive in the extreme to think that the United States, would go for this option," argues Seccarecia. "The more realistic scenario would see Canada scrap the Bank of Canada, adopt the US dollar, and get a Canadian seat on the US Federal Reserve Board. But this would mean an even more complete surrender of sovereignty."

Monetary integration will not help solve Canada' major economic and social problems: -chronic underutilization of our human resources, the growing inequalities both among individuals and across regions, and the underfunding of health care and education. The study warns that dollarization could lead instead to even higher unemployment and a decline in the Canada's living standard.

Seccareccia concludes that instead of dollarization what is needed are Bretton Woods-style controls on financial capital that would allow flexible exchange rates to function without destabilizing disturbances, and prevent the kind of speculative attacks that led to the Mexican and Asian financial crises in the 1990s. He admits that such controls would require international cooperation, but notes that such cooperation has been achieved recently in the post-September 11 international resolve to combat terrorism.