Will North America imitate the European Community?

Editor's Note: The dollar is increasingly despised and depreciated in the world. Is it a new currency is replacement of the dollar? It is likely that the gaps between the economies that make up this community currency can be solved at the beginning of its creation, but what about the future? Let but the history of the European Community. I can send your comments to: paola@moneyweekes.com

Will North America imitate the European Community?

Buenos Aires, Argentina

April 24, 2008

The dollar is growing weaker and weaker and the euro continues to gain prominence. On Monday itself, the European currency was able to break the barrier of U.S. $ 1.60. Meanwhile, for the United States, this situation to some extent a relief because it allows you to rearrange its large imbalances. At the same time, the loss of power and prominence that the dollar is suffering in the world, it still generated a concern to the government of George Bush, from a long-term strategic vision.

"The world is becoming less and less interest in holding dollars," said Soros ... Is it just a matter of preference?

Possibly, further worsening their economic situation, it is very difficult for the U.S. regained the world is losing. Why, this time will be more difficult than at other times as it was in the oil crisis of the 70s? I understand that maybe this was not an entirely appropriate time to suffer a crisis of this nature, right in the midst of a world in which consolidates the strength of the European Community common government institutions, such as the ECB gains in reputation and is reflected in the value of its currency.

Right now, the U.S. comes to experience a crisis when world powers are emerging as China, India and Brazil. The emergence of new giants, no doubt that threaten American leadership and the dollar as world currency of reference.

But then ... What could make U.S. to recover, at least in part, world leadership? Perhaps, as the other economies (especially Asian) continue to grow strongly, while the U.S. do it in a slower manner, the importance of America in the global context is likely to continue declining.

It is likely that the lessons of this crisis for all other countries, the dollar will regain it very expensive place (if they were to do so). Precisely, this potential loss of leadership was, for several years and the beginning of this cycle's declining dollar raised by some institutions, this situation is that it sought a solution: it would be the creation of a currency common U.S., Canada and Mexico. And to have name: the Amero.

The Amero is an idea based on the European Union currency, the euro, whose proponents of the proposal are the CD Howe Institute and Fraser Institute of Canada and the Centre for Development Research AC (CIDAC) of Mexico. It would be a common currency for North America extended to the rest of the Americas. Initially circulated currency in the countries of the North American Free Agreement (NAFTA) because Greenland is an autonomous territory belonging to the Kingdom of Denmark in Europe.

The project is progressing and even suggested a release date of this North American Monetary Union: perhaps the January 1, 2010, Canada, USA and Mexico will replace their national currencies with the Amero. That day, all notes and coins denominated in U.S. dollars be changed at a rate of one by one by one Amero (A). Canada and Mexico will change its currency, the Canadian dollar and Mexican peso, at an exchange rate that leaves unchanged the competitiveness and wealth of both nations. In all three countries the prices of goods and services, wages, investments and liabilities will be converted simultaneously to America at the same rate of exchange which became the national currency.

So far, it would be very interesting. But what is viable monetary union, initially between the U.S., Mexico and Canada? The first thing to analyze is if they meet certain requirements to enter these countries may constitute an optimal currency area. Do not go into this discussion, but in principle between these countries understand that you can create a currency area, by the close relationship with their economies.

But the question that matters is what these countries would gain by creating a currency area.

For Mexico and Canada, linking exchange rates and have a common monetary policy can lead to greater economic stability and may enhance economic growth. The convergence of interest rates also would be another beneficial element for these countries. Perhaps the potential loss of monetary sovereignty may lead to resistance in these countries, but surely, improving the economic situation may emerge, limited resistance.

What U.S. win with the introduction of the Amero? In relation to the situation prior to the weakening dollar, honestly I would not win anything. Moreover, it is a more disadvantageous to the U.S. share a currency with Mexico and Canada, where until now has benefited possess loneliness is a world currency.

But with the progressive weakening of the dollar, the emergence of a new currency, may be attractive as it will prevent further loss of global dominance. At the same time, the macroeconomic stability and economic growth of their neighbors, can generate higher profits in the U.S. economy through closer ties with them.

Will this new currency would occupy the vacant place the dollar? For this to be so, there is a condition that, while necessary, do not think the end to ensure the success of this attempt to retain market leadership in the global money: the monetary area (and especially the U.S. ) should adjust its imbalances if you want the Amero has a chance. Even so might some of the coins that are emerging (is the yuan?), Robs the place. If the above does not fit the plan of a regional currency is doomed to failure before you start shooting.

We will meet again tomorrow,

Horacio Pozzo