… Mexico, the US and Canada? Potential Monetary Union!

WikiCommons, author: Bosonic dressing

For some years now, rumors about a future after NAFTA are running wild all over the web.
Conspiracy theorists seem to think that a North American union will follow the current free trade association, along with the implementation of a joint currency, the “Amero”. Some even claim, that the ultimate goal is to form a “one world government”.

With little official information available, this article intents to bring some light to the matter and investigate if there is any truth to the claims.

Historical background:

The idea of a single currency for NAFTA countries first gained support after the Mexican crisis in 1994. Mexico was carrying a large budget deficit, so when the assassination of a presidential candidate and a short conflict with the Zapatista Army of National Liberation, an armed revolutionary group damaged investor confidence the government did not have sufficient funds to stabilize the currency. As a result, the peso quickly lost value with the exchange rate rising from about 3 to 1 to over 7 to 1 within a year, eventually stabilizing around 8 to 1.

The Asian crisis in 1997 developed similarly. Due to a high burden of foreign debt, the Thai government was forced to let the Baht float, which caused devalued stock markets and plummeting asset prices not only in other Asian countries, but in secondary markets as well. When the crisis hit Mexico, the exchange rate to the dollar rose again from 8 to 1 to more than 10 to 1. Overall, that means it tripled within just four years.

Created based on rates by x-rates.com

The case for the Amero:

With that background in mind, Herbert G. Grubel wrote a thesis called “The Case for the Amero” for the Fraser institute, an independent Canadian research organization in 1999. [1] In his paper, Grubel advocates a potential monetary union of the US, Canada and Mexico.

Based on his research, Grubel concludes that a monetary union would result in greater price stability, lower long-term interest rates, enhanced trade due to the elimination of the costs of currency trading and risk, and greater productivity. All of these would effectively create more wealth in Canada for personal and social ends.

For the US, Grubel predicted benefits as well, saying a monetary union would reduce the threat to the power of the US dollar that he expected to result from greater use of the euro in place of the dollar in the rest of the world. Today, we know that he was fairly correct with that prediction, given that the dollar has lost significantly with regards to the euro.

As for the practical implementation of a monetary union, Grubel suggests that a trinational central bank be installed. This bank, he says, shall only be responsible for price stability like the European Central Bank, instead of bearing joint responsibility for employment issues like the current Federal Bank of the USA. In his opinion, a triparte central bank is desirable, as it would be less open to political meddling than national banks.

Michael Chriszt for the Federal Reserve Bank of Atlanta:

After a visit of Mexican president elect Vicente Fox to the US in 2000 where he proposed, among others, an eventual single currency for NAFTA, Michael Chriszt seriously investigated the issue for the Federal Reserve Bank of Atlanta [2], weighing between the concepts of dollarization and monetary union.

Dollarization would mean that Canada and Mexico adopt the US dollar as their currency, like Panama did in 1904 and Ecuador recently did in 2000 following the collapse of its sucre to re-establish trust in the official currency. In this case, the US would not have to be an active participant, because they would not have to relinquish their management of monetary policy. Adopting countries however would lose the lender-of-last resort facility of their central banks, since they could no longer issue currency. Also, the dollarizing countries would forego seignorage, the revenues governments gain by issuing currency. On top of that, they would give up any control over monetary policy.

Flags from WikiCommonsPanama and Ecuador have already adopted the US Dollar

A Monetary Union on the other hand would require substantial cooperation between the countries, as all national monetary policies would be abandoned in favour of a shared policy. The use of a single currency can generate multiple advantages such as the elimination of transaction costs and would likely lead to increased trade and investments within the area, thus increasing economic and financial efficiency.

Chriszt evaluated the USA, Canada and Mexico on the basis of the criteria for Optimal Currency Areas [3]. In an OCA, all members can expect positive net benefits from their participation. He concludes, that a monetary union holds several advantages over dollarization for both the US and its NAFTA partners. Canada seems to be more suited for joining the US in a single currency arrangement, but Mexico is moving closer to fulfilling the criteria. However, Chriszt forecasts that it is unlikely that the three countries will pursue a monetary union in the near future, because economic integration of NAFTA is still developing and financial integration has hardly begun.

Vicente Fox, picture: WikiCommons

Vicente Fox:

In 2001 then-president of Mexico Vicente Fox gave the following statement in an interview for “Commanding Heights” [4], a PBS program:

“Now we want to go further. I’m talking about a NAFTA plus, a NAFTA that takes us to a further integration. I’ve been talking with [U.S.] President Bush, and fortunately he’s seeing it the same way. In the long term what we’re looking for is convergence of our two economies, convergence on the basic and fundamental variables of the economy, convergence on rates of interest, convergence on income of people, convergence on salaries. Of course this is a 10-, 20-year program. But when we reach that level, then we can just erase that border, open up that border for [the] free flow of products, merchandises, [and] capital as well as people.“

His comments spiked rumors and discussions all over the internet, both about a coming North American Union, as well as the potential introduction of the “Amero”.

The SPP:

Then in March 2005, the Security and Prosperity Partnership of North America (the SPP) was launched. Officially, the SPP is nothing more than a partnership between the United States, Canada and Mexico to increase security and to enhance prosperity among the three countries through greater cooperation. [5] Official goals include ensuring “that North America is the safest and best place to live and do business […and] to keep [the] borders closed to terrorism yet open to trade.” Also, the SPP aspires to make North American businesses more competitive on the global market.

Conspiracy theorists however became even more determined that a North American Union was in the works, as a result of the SPP. Some even claim that it has already been founded behind closed doors. Soon thereafter, first drafts of possible Amero coins and bills started popping up on various webpages. The whole issue became a real internet phenomenon and took on a life of it’s own. Today, you can even buy the first mock-Ameros on ebay.

Naturally, youtube offers multiple videos on the issue too, I suggest you have a look at this one:

Reaction of the US government:

The US government quickly reacted to the internet debate by including a myth and fact page on their official information about the SPP [6] where they claim among others that the SPP is not a treaty but an open dialogue, and that it does not work towards the creation of a European-Union-like structure.

Resistance in Canada:

Nonetheless, rumors and theories continue to float on the internet, and severe resistance to the SPP has formed in Canada [7].

The Council of Canadians, Canada’s largest citizen’s organisation, harshly criticises the SPP as anti-democratic, because the NACC, a committee composed of representatives from some of North America’s largest companies, have been mandated to set priorities. The public and elected officials however, are shut out of the decision process.
Prosperity is only enhanced for big corporations, they say, who will benefit from easier movement of cheap, non-unionized Mexican workers.

In Canada however, it will lead to a drop in salaries and deteriorating working conditions. Indeed, the SPP has lead to some results for Canada: In a 2006 SPP report, stricter pesticide residue limits in Canada were identified as a “barrier to trade”, causing Canada to raise limits on hundreds of fruits and vegetables. Also, the SPP calls for a five-fold increase in Canadian tar sands production, which would make it impossible for Canada to reduce greenhouse gas emission while at the same time quintupling the toxic wastewater by-production.

Also they criticize the US’s “war on terror” policies, especially the “no fly lists” that they consider a violation of human rights.
The population seems to agree with them. A study shows that 83% of Canadians would rather have an independent foreign policy even if it hurts trade, than align with the US’s security” policies.

Outlook:

Canadian resistance notwithstanding, the political reality seems to be moving towards a monetary union.
After the trilateral agreement, an independent task force from the council on foreign relations [8] was asked to make recommendations for the future based on what was agreed on in Texas. Based on NAFTA’s success, which includes a doubling of trade within North America, the task force’s central recommendation is the establishment of a North American economic and security community with a common external tariff by 2010, with the goal of guaranteeing a free, secure, just, and prosperous North America. Additionally, they identify three common challenges that need to be addressed:
The shared security threat, the challenges of increased global competition, and the issue of uneven economic development.

The potential future outlined by the task force goes way beyond what has officially been agreed on. They not only call for a unified North American border action plan with harmonized visa and asylum regulations, entry and exit procedures, and full data-sharing, but even suggest a North American Border Pass with biometric information. Also, the task force encourages Law Enforcement and Military Cooperation and the establishment of a trinational threat intelligence center.
Furthermore, they make ecological and economical suggestions, calling for a commitment to a cleaner environment and advocating the implementation of a “tested once” policy for pharmaceuticals. They claim the latter could raise return rates on new pharmaceutical products by an average of 4.8%.
Also, the task force calls for a mutual recognition of professional standards and degrees and promotes student and teacher exchange programs to foster a greater sense of a North American identity.

A greater sense of North American identity… That almost sounds like some of the theories aren’t too far-fetched after all…
So is the Amero coming? We shall see!

Sources:
Federal Reserve Bank Atlanta [1], [2], Fraser Institute, Council on Foreign Relations, PBS, IMF, Official SPP info [1], [2], [3], Council of Canadians and Youtube