A shock to the system

Ross Laver

Almost as quickly as it arose, the debate over a single North American currency has disappeared from the political and economic radar screen. It isn’t hard to figure out why: with a few exceptions, the country’s policy-making elites are dead set against the idea.

Their position was spelled out clearly last month by Bank of Canada governor Gordon Thiessen, a man more often given to obfuscation than plain speaking, as befits a central banker. The occasion was a luncheon speech on the launch of Europe’s new common currency, the euro, which Thiessen acknowledged was “an economic event of historic proportions.”

Paradoxically, the bank governor went on to suggest that Canadians need draw no lessons from Europe’s experience.

Saying he wanted to “nip in the bud” recent discussions about the possible advantages of a common North American dollar, Thiessen insisted that Canada’s policy of exchange-rate flexibility has “served us well over time.” Why, he asked, would we want to give it up?

The question deserves a response. Before getting to the substance of Thiessen’s argument, however, it’s tempting to ask whether his concept of “serving us well” includes a 37-per-cent decline in the Canada-U.S. exchange rate over the past 25 years. If that’s how the Bank of Canada defines success, one wonders what would constitute failure.

That aside, there are two major problems with Thiessen’s defence of the status quo. The first concerns his contention that the Canadian and U.S. economies are simply too different to contemplate a currency union, and will remain so for the foreseeable future. It’s true that manufacturing and high-technology represent a significantly greater share of economic activity in the United States than in Canada. But the differences between the two countries are surely no greater than those between, say, Portugal and Germany, both of which have embraced the euro.,

Far from fearing the consequences of monetary union, Portugal’s governing classes see the euro as an essential tool in their efforts to encourage investment, create jobs and narrow the economic gap with the richer nations of Europe. They opted for a common currency precisely because they want to reduce the differences between Por-

tugal’s economy and that of Germany and its wealthy northern neighbours. Perhaps Thiessen knows something that the Portuguese don’t.

Thiessen’s second point—the core of his argument, in fact—is that Canada needs a flexible exchange rate as a “shock absorber” against changes in economic circumstances, such as the rapid decline in commodity

prices over the past two years. On average, commodity prices have fallen by 25 per cent since the start of 1997, dragged down by slumping demand in Asia. In his speech, Thiessen said that the weakening of the loonie over that period had allowed Canadian resource exporters to survive without having to lower prices and wages or endure major movements of labour and capital.

On that score, he’s absolutely right. But what Thiessen neglected to point out is that the recent drop in commodity prices was not some historical aberration. The pace of decline was certainly faster than would nor-

mally be the case, but commodity prices have been on a downward slide for 200 years, falling in inflation-adjusted terms by 0.35 per cent a year, according to a study by the Bank Credit Analyst Research Group in Montreal. Moreover, a report published by the World Bank this month concluded that commodity prices were already on their way down before the Asian crisis hit in 1997. Even a turnaround in Asia, the bank said, won’t spark a full recovery in the resource sector because the underlying causes of the price decline are technological change and increased production.

The obvious lesson here is that Canada’s continued dependence on raw material exports is a blueprint for further reductions in our national standard of living. Commodity prices—and, consequently, the Canadian dollar—will rise and fall over time depending on global economic conditions, but the long-term trend is downward. If we accept Thiessen’s “shock absorber” view of the exchange rate, it won’t be too many years before the loonie is worth 50 cents (U.S.), or even less. We’ll fall further and further behind our major trading partners, all for the sake of preserving jobs and profits in Canada’s gradually withering resource industries.

Tithe Bank of Canada gover nor-or anyone else in Ottawa, foi that matter-has a solution to this dilemma that does not involve sur rendering what little remains 01 the country's monetary sovereign ty, it would be nice to hear it. Tc date, however, Canada's politicai leaders have taken the easy wa~ out. By allowing the dollar to coasi downhill, they've managed tc avoid dealing with the reality thai our economy faces serious struc tural problems-problems that can only be resolved by breaking our dependence on commodities and forcing industries to becom€ more productive and competitive. The shame of it is that many 01 those in power already under. stand the severity of Canada's problems, but are afraid to tell vot f,~r

turfed out of office at the next opportunity So far, only a few brave souls have dared to address the subject. One of them, interest ingly enough, was Raymond Chrétien, Canada's ambassador to Washington and the Prime Minister's nephew. "Elections are fought, won and lost on these kinds of is sues," the ambassador said recently when a reporter inquired about the prospects for a single North American currency. "But there is no question that if the European model is successful, our descendants will have to deal with it." Assuming, of course, that Cana da can wait that long.