Single currency not so 'wacky': bank

Respected economist says Canadians are being 'sensitized' to single currency

Canadians are being prepared for the possibility that they may have to abandon the dollar in favour of the American dollar, says a longtime critic of Canada's floating exchange rate and advocate of a currency union with the United States.

The issue exploded this past week in the wake of a controversial study by the TD Bank, and then comments by Bank of Canada governor David Dodge, suggesting that in 10 years or so Canada may want to consider adopting the U.S. dollar.

"They're sensitizing people to the fact that somewhere down the road there may be important implications arising from the defects of having a flexible exchange rate," highly respected economist Tom Courchene of Queen's University said in an interview yesterday.

"Increasing the awareness of citizens of this issue brings it closer in time."

The Bank of Canada argues that its current policy of a floating exchange rate is still in Canada's best interest.

But internal bank documents, obtained under access to information procedures, reveal that it accepts that may not always be the case. The documents indicate that Bank of Canada officials no longer reject a common North American currency as a "wacky" idea or believe that a common currency necessarily implies a loss of political sovereignty.

The documents appear to lend support to Mr. Courchene's view, while raising questions about Finance Minister Paul Martin's claim that bank studies have "demonstrated unequivocally the importance of Canada maintaining the Canadian dollar."

"I also agree with your point that it is important for the bank to be open and be willing to consider other exchange rate options," James Powell, chief of the bank's international section, said in a memo last year to Jean-Pierre Aubry, director of the bank's Montreal bureau.

"The line we have been taking here in International is that a common North American currency (or more likely dollarization with, hopefully, a Canadian seat in the Fed system) is not a wacky idea if the Canadian and U.S. economies become increasingly similar," Mr. Powell's response continued.

"Finally, I am not entirely convinced that monetary union necessarily implies a need for common political institutions," Mr. Powell said, noting that Panama uses the U.S. dollar, but remains politically separate.

Until this past week, however, the central bank, at least publicly, has dismissed the idea of a common currency, which has sparked considerable interest due to the long-term slide in the Canadian dollar.

"There is an evolution that seems to be occurring," Mr. Courchene said. "The way the TD Bank put it, and the way the governor put it as well, is that with greater integration of the Canadian and U.S. economies, the rationale for a separate exchange rate to handle shocks to the Canadian economy seems to disappear."

But he disagreed with the TD Bank's conclusion that the only real alternative to the existing floating exchange rate would be the adoption of the U.S. dollar, or what is called dollarization.

"I'm quite nationalistic on this issue, I'm on the side of the angels," said Mr. Courchene, arguing that a currency union with the United States would be preferable to dollarization.

"Let's get a better alternative, creating a North American monetary union, where we can keep the Bank of Canada, where we can keep some symbolism on our currency."

Critics of that idea argue that the United States would never enter into any currency union in which it had to share control over monetary policy.

But Mr. Courchene says the growing influence of the euro will encourage the United States to consider a currency union with Canada, Mexico and possibly other countries.

But even if Canada had to accept U.S. monetary policy in any currency union, it would not be such a big problem, Mr. Courchene said. "It's a hell of a lot more stable and better than our monetary policy, so that's a plus."