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Commentary: A NAFTA Dollar: Not Now, Maybe Later
Now that the euro has had a successful debut, is it time to start thinking about a dollar bloc in the Western Hemisphere? A few brave policymakers are suggesting that North American Free Trade Agreement members--the U.S., Mexico, and Canada--at least consider the idea.
A North American version of the euro is unlikely--and probably unnecessary. For starters, the U.S. economy dwarfs its NAFTA neighbors, unlike the European Union, which brings together 15 relatively similar, densely populated, industrialized states. And pushing for a new unit to replace the dollar, already a global reserve currency, is apt to be an unwinnable political crusade in the U.S. More practical would be dollarization. Since the NAFTA partners already do lots of business in greenbacks, adopting the dollar outright seems logical. If NAFTA spreads, as free-trade advocates hope, dollarization throughout the Americas could follow.
The idea of such a dollar bloc has gotten little respect so far. One reason: traditional Canadian fears of being swallowed up by their southern neighbor. Lately, the most high-profile advocates have been Quebec separatists. Always ardent free traders and proponents of strengthening the relationship with the U.S., their endorsement only makes the idea even harder to swallow for Ottawa.DOLLARIZATION. Still, the proposal offers clear pluses. Corporate and private investors, for example, would more willingly put money in places where they don't have to fear currency swings. That's why prominent economists and business leaders in Mexico endorse the idea. Trade would also be simpler and cheaper without currency hedging costs. Dollarization, notes Michael Walker, executive director of Vancouver's Fraser Institute, "would make us all one economic space."
And dollarization would end the risk of speculators fomenting currency disorder, a la Asia. Currently, Brazil is trying to cope with its budget crisis with floating exchange rates for the real. But if that tactic doesn't work, policymakers might clamor for dollarization.
Indeed, the dollar is already embraced throughout the hemisphere. Commodities such as Canadian paper and pulp and Venezuelan oil have long traded in dollars and the elite in Latin America use the greenback as the benchmark for high-value items such as real estate. While Panamanians use their own coins, they rely on U.S. dollars for their paper money. And Argentina now operates with a currency board, backing its peso with U.S. dollar reserves. President Carlos S. Menem also has his economic ministry studying how full dollarization might work. "Unofficial dollarization is happening everyplace," says Steve H. Hanke, a Johns Hopkins University economist.
Of course, there remain some major--perhaps insurmountable--objections. While the Europeans have surrendered control to an autonomous European Central Bank with directors from across the Continent, the U.S. is likely to insist on dictating monetary policy because of its size. How then would policy be made around this new superdollar, and would the U.S. be forced to give seats at the Federal Reserve table to outsiders? Inevitably, this would lead to disagreements, particularly when then U.S. is less anxious to stimulate growth than other NAFTA nations.
There's more at stake than national prestige. Countries might have to lose the ability to devalue, a time-honored tool for spreading economic pain. And there would be pressure on Canada and Mexico to harmonize their tax and budget policies with the U.S. to avoid capital flight. Outside NAFTA, in the other wildly disparate Latin countries, the coordination problems would be worse. "One size doesn't fit all," says Barry Eichengreen, an economist at University of California at Berkeley.
Adopting U.S.-style economic principles, however, might address nagging problems. For instance, cutting Canadian taxes below 50% marginal rates could spur enough growth to bring down a jobless rate, which at nearly 8% is almost twice the U.S. level. Likewise, if Latin countries could wrestle monetary policy away from waffling governments, investors might feel more confident.
Few in the Americas seem ready for a single currency. But if the euro gives the Europeans a competitive edge, the NAFTA dollar may be inevitable. Politicians who once won points from nationalist voters for quashing the idea may find that history puts them in the same camp as the mercantilist opponents of free trade.By Joseph Weber