Should the United States, Mexico and Canada follow Europe's
lead and move toward a North American currency area as well as a
freer regional trade zone?
The question is not on any official agendas. But the Federal
Reserve Bank of Dallas and the Mexican central bank are quietly
studying coordination to dampen swings in the peso-dollar rate.
Some hard-pressed Canadian exporters are urging Toronto to peg the
Canadian dollar to the U.S. dollar.
And the former Federal Reserve chairman, Paul A. Volcker,
recently predicted that "in five years, you will find a fixed
exchange rate among the peso, the U.S. dollar and the Canadian
Harvey Rosenblum, research director of the Federal Reserve Bank
of Dallas, said: "You don't have to go all the way to a single
currency to get some of the advantages. A tacit agreement to keep
rates within a narrow band, absolutely fixed rates, or a single
currency are all degrees of the same thing."
Since its economy is by far the biggest of the three, the
United States would probably feel fewer effects of currency linkage
than Mexico or Canada.
With steadier exchange rates, importers and exporters would
face fewer problems, less uncertainty and lower business costs.
Rosenblum compares bumpy exchange rates to pothole-strewn highways:
"You can haul the goods, but it's a lot tougher."
Predictable exchange rates could also increase investor
confidence, helping to broaden financial markets and bring in more
investment _ particularly in Mexico where the perennial worry
remains the risk of a sudden flight from the peso.
"Economists always say that you can hedge," said Richard
Cooper, an economist at the Kennedy School. "But you can't hedge an
investment with a 10-year life."
Stable exchange rates could also help defuse a potential
backlash against freer trade from business and unions by minimizing
large swings in currencies.
Finally, linking currencies "puts pressure on high-inflation
countries to mend their ways," said Robert Gay, an economist at
Morgan Stanley. In Mexico, inflation has been running at 20
percent, multiples of the 3.5 percent in the United States.
The peso was, in fact, linked to the U.S. dollar during the
1950s and 60s _ "a remarkable period of growth and stability and
open capital markets in Mexico," as Volcker put it.
Few economists would deny that these benefits may accrue. But
many believe that the economic case for giving up floating rates
and edging toward a North American currency area is much weaker
than in Europe _ quite apart from the fact that the merest whisper
of economic integration raises hackles in Canada and Mexico. …