In Canada the debate over the status of an independent national currency has long historic roots. Indeed, these roots pre-date Canadian confederation with the issue of currency union with the US being actively debated in the 1850s (see Helleiner 2001). More recently, the debate re-surfaced in the early 1990s as a result of the prospect of monetary union in Europe raised by the Maastricht Treaty and as a result of the Parti Québécois’s flirtation with some form of North American common currency as a stone on the path to Québec sovereignty.
The most recent round of debates started in 1999 with the birth of the virtual euro as its temporal spur. Added to this were the decline of the Canadian dollar against the US dollar in the wake on the Asian financial crisis (a decline interpreted by some of the looser talk of the pro-monetary unionists as
representing a decline in Canadian living standards), the publicity given to the award of the Nobel prize in Economics to Canadian-born Robert Mundell who has been widely seen as the “father of the euro”, and the continuing interest in a North American currency by the Québec sovereignty movement. These factors led to a flurry of conferences in both academic and government circles and to a lively debate in the news media about the future of the Canadian dollar.
The debate centered around a number of key issues both economic and political. These can be listed briefly (but not exhaustively) as follows5:
(1) Whether the advent of the euro indicated that there was a new trend towards fewer currencies. Proponents of monetary union argued that the euro was an epoch-defining event. For example, Courchene and Harris (1999: 3) argued that “The introduction of the euro in January 1999 represents a watershed in the annals of economic and monetary history. At one level, the advent of the euro signals the denationalization of national monetary regimes; at another, it signals that, in a progressively integrated global economy, currency arrangements are a supranational public good, one that is arguably consistent with a twenty-first- century vision of what constitutes national sovereignty.”
Even opponents of monetary union conceded that a trend towards fewer currencies might be underway and that this was problematic for the continued existence of the Canadian dollar. John McCallum (2000: 7), then chief economist at the Royal Bank, and prominent advocate of a flexible exchange rate, conceded “that in a world that would otherwise have only three currencies, it is unlikely that the Canadian dollar would constitute the fourth. However, to the extent that the reader agrees that the benefits of the status quo exceed the costs, the implication is that Canada should not seek to speed up this grand historical process that is allegedly leading to only one, two, or three currencies.”
(2) Whether the decline in the Canadian dollar reflected “fundamentals” or was the result of persistent “misalignment”. The Bank of Canada’s famous –or infamous depending on your perspective – exchange rate equation purported to show that the decline of the Canadian dollar tracked very closely, and was explained by, the downward path of world commodity prices. The sinking dollar was therefore behaving as expected (and hence blame for its fall could not be attributed to particular policy choices). This line, put forward by Bank of Canada economists (see Murray 2000) and their defenders (see Laidler 1999) was used to refute the arguments of proponents of monetary union such as Courchene and Harris (1999) who viewed exchange rates as being subject to long periods of
5 See also Bowles, Croci and MacLean (2004) for a fuller review of some of the issues in
misalignment; misalignments which had asymmetrically deleterious effects on the Canadian economy (on which more below).
(3) Whether the flexible exchange rate and the fall in the value of the Canadian dollar had been a cause of Canada’s perceived poor record on productivity growth. The central issue here was the decline in the level of productivity in the Canadian manufacturing sector relative to that in the US over the past decade; a “puzzle” in that this contrasted with what pro-free traders expected to happen as a result of the greater competitive pressures on Canadian manufacturers emanating from the NAFTA. The falling dollar, the monetary unionists argued, insulated firms from these competitive pressures and led to lower levels of investment in productivity raising-capital (see Courchene and Harris 1999 and Grubel 1999). The flexible exchange rate therefore caused slower productivity growth. This argument met with its fair share of skeptics who questioned this so-called “lazy manufacturers hypothesis” on theoretical grounds (it was inconsistent with the neoclassical theory of the profit maximizing firm), on empirical grounds (it seems that this bout of laziness was confined to two sectors of manufacturing industry)6 and on logical grounds (if firms need to be induced to
invest more in productivity enhancing capital goods why not increase wages rather than fix the exchange rate?). The skeptics were not being complacent about the so-called “productivity puzzle” but did not believe that the flexible exchange rate was a causal factor and argued that productivity questions should not be addressed by policies that sought to change Canada’s hard-won “stable monetary order” (Laidler 1999).
(4) Whether a sharing of monetary sovereignty with the US was a politically possible option. While pro-monetary unionists debated various forms of common currency and shared monetary sovereignty arrangements, such as the North American Monetary Union (NAMU) and the amero, opponents argued that, given the reality of US power, the only realistic choice was between outright dollarization or the maintenance of a Canadian currency.
In Australia, the level and terms of debate have been very different. In the wake of the Asian crisis, the fall of the Australian dollar to historic lows against the US dollar led to little in the way of outbursts of angst about falling living standards. Rather the commonly held view across government, academic and business circles was that the flexible exchange rate did what is was supposed to do – depreciate so that Australia could weather the turmoil around it and avoid a recession. The fact that export growth continued and buffered the economy from
6 The two sectors are industrial machinery and electrical and other electrical equipment.
negative demand shocks was taken as evidence of the wisdom of having a flexible exchange rate regime. In Canada, continued export growth in the aftermath of the Asian crisis was also held up as displaying similar wisdom by some of the anti- monetary unionists (see Laidler 1999 and McCallum 2000). The difference is that in Canada they were opposed by a sizeable monetary unionist faction; in Australia they were not.
The birth of the euro was greeted with far less fanfare in Australia than in Canada and the threat that the euro posed to the “inevitable” elimination of the Australian dollar as the world moved to fewer currencies was not an issue. In fact, while McCallum, as noted above, lamented the possible loss of the Canadian dollar if there proved to be an historic trend towards fewer currencies, conceding that it was unlikely to be the fourth currency, on the other side of the globe another private sector bank economist, John Edwards, Chief economist at the HSBC in Sydney, was proclaiming the rise in the importance of the Australian dollar as the result of the abolition of European competitor currencies! In a Report entitled “The Fifth Global Currency”, Edwards (1998: 2) wrote that “the increasing integration of Europe and the coming recovery in Asia … is about to catapult the Australian dollar to a new status as the fifth global currency.” Furthermore, he added, “over the next four or five years, the world’s most frequently traded currencies will be reduced to the US dollar, the euro and yen – with the Australian dollar, Swiss franc and the Canadian dollar vying for fourth place.” (ibid).
In Canada, the Bank of Canada held its annual conference in 2000 on the theme of Revisiting the Case for Flexible Exchange Rates which had a strong Canadian focus. In 2001, the Reserve Bank of Australia held its annual conference on Future Directions for Monetary Policies in East Asia. The focus was on fixed versus flexible regimes for East Asia with the one paper on Australia – looking at the case for a monetary union between Australia and New Zealand – being written by a former employee of the Reserve Bank of New Zealand working in the US.
In Canada, attention was focused on the “puzzle” of the relatively poor productivity performance in manufacturing industry and links with the exchange rate regime hypothesized. In Australia, academics and government agencies puzzled over the existence and causes of Australia’s productivity “miracle” of the 1990s. The irony is that productivity performance in both countries has actually been quite similar. For example, the Productivity Commission’s Dean Parham (2002), in a paper entitled “Productivity Growth in Australia: Are We Enjoying a Miracle?”, reproduced the following OECD figure as illustrating the “miracle” in need of explanation.
Australia has certainly performed well on this measure. But so has Canada; the “productivity miracle” on this measure is applicable to Canada as well as to Australia. Furthermore, in both countries, manufacturing productivity has lagged behind this aggregate measure. In Australia, the sectors in which productivity growth has been the highest are the wholesale trade, construction and finance and insurance. There has been no “miracle” in manufacturing; indeed Productivity Commissioner Gary Banks concedes that manufacturing’s contribution to overall productivity growth in the 1990s “slumped” (see Banks 2003). The “productivity puzzle” – of why trade liberalization has not spurred productivity growth in manufacturing – is applicable to Australia as well as to Canada.
However, in Australia, the focus of attention has been on understanding the causes of the good overall productivity record with the most common explanation being the importance of microeconomic and regulatory reforms. In Canada, the focus has been on Canada’s relatively poor productivity record in manufacturing despite the good overall productivity performance. The impact of a macroeconomic variable, the exchange rate, on productivity has been a significant area of debate as a result of the “lazy manufacturers hypothesis” as noted above.
There is no greater understanding of exchange rate movements in Australia than in Canada. Indeed, there is general acceptance that there is no model of the exchange rate which can plausibly explain the recent path of the Australian
dollar.7 This has not led to any discernible pressures from business or academics for greater currency stability or concerns over “misalignment”. The flexible exchange rate regime still enjoys overwhelming support. Indeed, Melinda Cilento, Chief Economist at the Business Council of Australia, was quite right in her comment that “in terms of the floating exchange rate regime, I suspect that you would struggle to find someone that doesn't support it.”8 There would be no such struggle in Canada and, while the business community is divided on the issue, a survey of business leaders reported in The National Post in 2001 nevertheless found that “almost half of Canadian executives favor adopting the US dollar.” 9
Why should two countries with considerable similarities in economic structure and recent exchange rate history display such stark differences with respect to monetary union issues? The next two sections argue for the importance of the “geographical” and “contingent neoliberal” contexts in providing an answer to this question.