The Nation's Business

The death of the Canadian dollar

Jean Chrétien says don’t worry, be happy. But the real question is whether the loonie can survive as a world currency.

Peter C. Newman July 27 1998
The Nation's Business

The death of the Canadian dollar

Jean Chrétien says don’t worry, be happy. But the real question is whether the loonie can survive as a world currency.

Peter C. Newman July 27 1998

The death of the Canadian dollar

The Nation's Business

Peter C. Newman

How defightful to have a prime minister who doesn’t care about the state of his country’s currency. In Japan, politicians are committing career hara-kiri as they watch the yen sink into oblivion, but Jean Chretien’s response is don’t worry, be happy—the sinking dollar is great for the tourist trade.

That’s all we get, and it’s not enough.

The clear and present danger is not how low will the Canadian dollar go—but how long will the Canadian dollar last.

Squeezed between the new and powerful euro currency and the still mighty American dollar, can Canada’s relatively minor currency survive as a meaningful means of exchange? No responsible politician wants to deal with the issue, but the answer is probably no.

Throughout recorded history, no one imagined that the European nations, which invented nationalism and dominated most of the economic events of the past century and more, would ever surrender their sovereignty and join together in a common currency that ends control over their individual economic destinies.

The details are different but the thrust is the same: just as Europe has marched from a freetrade area to a common market to economic union, and now a common currency, North America will be forced to go through a similar process. Most Europeans didn’t want or intend to go this far, but they were driven ever onward because each step forward they took was required to make the last one work. Thus, from the very early beginnings of a European Coal & Steel Community, which included only Belgium, Luxembourg, the Netherlands, Italy, West Germany and France in a twoindustry shared market, 46 years later, the Europeans have had to give up their indiv-

idual currencies, which is the ultimate sacrifice because it means you’ve lost control of your monetary and most of your fiscal policies.

The process is called globalization and it will be the great motivating force of the 21st century. Like it or not, we won’t escape its consequences.

The Canadian dollar will not disappear this year or even this century, but as its value plummets its long-term existence is increasingly in jeopardy.

Those critics of the Bank of Canada who insist that it is time for Gordon Thiessen to step in and halt the hemorrhage are right in their sentiment (which is that something must be done to stop the drop in our standard of living) but not in their prescription. The Bank of Canada doesn’t have enough reserves to defend the currency, and sharply increased interest rates would only push us into a recession. “If you prevent the dollar from falling,” points out Stanley Hartt, former deputy minister of finance who is now chairman of the Canadian operation of Solomon Smith Barney, “you’re preventing it from accounting for Canada’s lower productivity and lower interest rates. I am not disturbed by the tradeoff. And I would never go for a pegged dollar because it’s like covering up a wound and preventing any treatment from getting at it.”

It’s a great irony that Canadians became so excited about Brian Mulroney’s Free Trade Agreement with the United States, but only yawned when he signed the North American Free Trade Agreement, an act which is proving to have much more profound consequences. (My own theory why Canadians ignored NAFTA is that they thought it was something you pour into lamps at the cottage, so what was the point of getting excited?)

Jean Chrétien says don’t worry, be happy. But the real question is whether the loonie can survive as a world currency.

But the parallels hold. There are many barriers to free trade under NAFTA that might be eliminated if Canada, the United States and Mexico had the same social and economic policies. That push will come first, and after that the pressure will start for either a one-currency continent (to compete with the euro) or a slightly diluted option which would see the Canadian dollar pegged to the American dollar. We already tried that in 1962, at 92.5 cents, which proved so unworkable it was unpegged eight years later.

“I believe that the euro will very quickly become an alternate to U.S. dollars for national reserves and if that happens, much will change,” predicts Scott Paterson, president of Yorkton Securities, who says there will be an equity boom for a Europe where investors need take no currency risks. “That could ostracize countries that still have stand-alone currencies, and Canada will be under enormous pressure. We will then have the choice of keeping a Canadian dollar that mirrors American monetary policies, or to abandon the Canadian dollar in favor of a North American currency. In fact, smart currency traders around the world are already discounting the effect of the euro on the Canadian dollar, which is one reason it has gone down so much.”

If all of this sounds unlikely, think of how preposterous it sounded when Jean Monnet, the French statesman, first proposed a united Europe in 1940. To have France and Britain, much less the other nine partners in the European currency agreement, voluntarily give up their economic sovereignties was an impossible dream—or nightmare. And yet it’s happened.

The Canadian dollar will disappear in our lifetime. When it does, I hope somebody remembers that wonderful fine from the NDP MP Michael Cassidy who once told the House of Commons in Ottawa, during a trade debate: ‘We are held back because of irresponsible decisions made in foreign boardrooms—decisions which should be made right here in Canada.” Perhaps it’s time for Jean Chrétien to get worried about the situation and save the Canadian dollar. As he likes to say—“the better, the sooner.”

Allan Fotheringham is on leave.

Allan Fotheringham