The ‘amero’ is also known as NAMU (North American Monetary Unit), a potential proposed concept currency to replace the three currencies currently in circulation within North America. If the amero takes hold, it would replace the Mexican peso, the United States dollar and the Canadian dollar which are presently circulating as respective national currencies today.
Following the implementation of the North American Free Trade Agreement (NAFTA) in January 1994, these three countries advanced to the next step of further economic integration with greater economic association between each of their respective economies. The next logical step from economic association is to enter into a monetary union arrangement whereby the new North American economic & currency zone would share one common central bank, one common interest rate and similar inflation rates.
The concept of the amero is similar to the European experience since year 1999 with the implementation of the Euroland euro whereby it replaced iconic currencies such as the French franc, German mark, Italian lira to name just a few. The new euro common currency zone for the most part is very stable economically with a sound currency and low inflation. Various rules and regulations are put in place for each member state who participates within the euro zone such as limiting deficit financing to three percent of GDP.
The proposed benefits of adopting a common currency for the North American currency zone include an increase in productivity, a decrease in volatility of the amero currency, removal of currency risks for those trading within the zone, reduced costs of trade - transaction, an increase in the overall standard of living while providing for an enhanced quality of life.
Challenges are mainly political to get it launched. With the euro zone, Sweden rejected adopting the euro as new national currency in a national referendum in September 2003, Denmark in September 2000 and UK government have declined participation as of yet. From the euro experience, the challenges they have incurred include a difference of policy preference. Today, Germany would prefer higher interest rates, cheaper imports. Conversely, France would prefer lower interest rates and higher inflation. Thus, differentiating preferences with respect to divergences in national inflation and growth rates.
Similar to the euro zone with one central bank representing the currency zone, the proposed amero currency zone will also have a common central bank. Each country will now have to take its proportionate share with respect to seigniorage which is the net revenue derived from the issuing of currency, it is an important source of revenue for central bankers. The central bank representing the amero currency zone may now have representatives from three countries instead of one, perhaps Canada sends one bank governor, Mexico one governor, the United States with thirteen reflecting GDP outputs per country.
Now the question of sovereignty, the same debate arose in Canada during the 1988 Federal election between Liberal Leader John Turner and former Progressive Conservative Prime Minister Brian Mulroney over the concept of free trade between Canada and the United States. Canada’s sovereignty has not been greatly impacted by free trade. With the amero, Canada will lose its monetary sovereignty to a degree in the ability to influence interest rates at various times in the commodity cycle as the Bank of Canada will cease to exist to be replaced by a new common central bank.
Today, many Americans are deeply patriotic, the thought of sharing a currency with another country is simply beyond reason. The fact is, ten countries and territory regions today use the US-dollar (USD) as their national currency such as Panama, Ecuador, El Salvador. Another 21 countries peg their currency to the USD while several countries allow for informal USD usage within their economy such as Peru, Cambodia, etc. Canada is unofficially already dollarized with the United States as many Canadians and Canadian corporations have dual Canadian dollar (CAD) and USD bank accounts. The Canadian mortgage market is highly correlated to the US bond market. True, the dollarized countries have no representation at the U.S. Federal Reserve for their own respective monetary policies. The USD today plays an important role as a global reserve currency which has helped to boost American economic interests thus maintaining its sovereignty. Contrary to popular opinion, the amero in our view will actually strengthen American sovereignty as the amero will provide for greater economic benefits to the United States. A stronger economy for America will enhance its sovereignty rather than to weaken it.
So is the concept of the amero really an earth shocking concept? BankINTRO.com does not think so. We actually support the concept of a unified currency for North America. However, it will depend on what kind of deal can be negotiated. There are great concepts and lousy deals. In order for the amero to succeed, it is a great concept but it will need a great deal to be negotiated. Outstanding questions linger to the degree of political unification and policies / laws to be orchestrated under one umbrella and what policies to remain within each individual country. BankINTRO.com supports currency union not outright political union although some policies maybe further integrated with an amero currency. This is a complex detailed topic that is outside the realm of this currency review of the amero presented by BankINTRO.com. Our focus is more on currency related topics that we feel might be of interest to the web site visitor rather than sovereignty / political issues that will arise from this currency debate.
It should be noted that the idea of the amero is not a new development for North America. From years 1785 to 1792, the Mexican peso circulating at that time was the official currency trading throughout much of North America. The peso remained a legal circulating currency in the United States up until year 1857 and in Canada up until 1858.
COMPARISON OF AMERO AND EURO CURRENCY ZONES
Since inception in 1999, it appears that the Euroland euro (EUR) is a successful currency experiment now with 13 countries on board with Malta and Cyprus to join January 1, 2008.
The combined amero currency zone has a total population of 443 million people, total economic output stands at approximately $15.3 trillion USD equivalent. Population totals include the United States at 301 million people, Canada at 33 million and Mexico at 109 million. Total GDP figures include the United States at 13 trillion USD, GDP/Capita at $44,000 USD. Total Canadian GDP amounts to 1.1 trillion USD, GDP/Capita at 90 percent of the United States. Mexico is the current weak laggard with a GDP/Capita income at $11,000 USD at about 25 percent of America’s, total Mexican GDP at 1.2 trillion USD equivalent as measured by PPP.
The European Union (EU) has 27 member countries with a combined GDP of $17.3 trillion USD equivalent amongst a total population of 500 million. However, not all EU countries participate in the common euro currency zone. At present, 13 countries use the euro with another two to join in January 2008. By 2015, there very well maybe upwards of another nine countries that are likely to join, these include the ranks of Czech Republic, Poland, Slovakia, etc. Let’s just assume that the United Kingdom, Sweden and Denmark remain on the sidelines of the euro as they keep their respective currencies for now and that the nine or so new European countries do indeed join the common euro zone. What we may have is a euro currency zone in the area of approximately 425 million citizens with a combined total GDP in the vicinity of $14.4 trillion USD.
It is interesting to note that we have an almost identical regional currency bloc in GDP and population for both the euro zone and amero currency zone. It is hypothetically likely that the euro and amero exchange value will trade close to par to one another within a reasonable trading range say plus/minus 15 percent of each other over the long term.
HYPOTHETICAL TRADING RANGE OF THE AMERO AGAINST THE EURO
When the euro came into circulation in January 1999, the euro traded as high as 1.17 USD to the EUR. Shortly thereafter, the American dot com high tech boom created enhanced capital inflows to American stock markets, appreciating the USD to 82.52 US cents to the EUR by October 26, 2000. Now at 1.45 USD to the EUR range, the USD may fall to 1.5 to 1.6 USD to the EUR, but ultimately our forecast at BankINTRO.com has the true USD trading range closer to 1.1 to 1.2 USD to the EUR. The USD overshot its natural euro trading level by several standard deviations on the upside back at the height of the US technology equity stock boom in 2000 - 2001. Conversely, at 1.4 to 1.6 USD to the EUR, the USD is currently at the bottom end of its long term stable trading valuation for the USD relative to the EUR.
Now with the hypothetical inception of an amero currency, a total GDP that will increase by approximately 15 percent with addition of Mexico and Canada, one can see many similarities between the euro and amero currency zones. With the addition of a potential nine European countries to the euro currency zone say by 2015, total GDP for the euro zone is expected to increase by $1.4 trillion USD equivalent compared to a $2.3 trillion USD gain for the amero zone reflecting a net gain of $900 billion USD to the amero currency zone (assuming 2007 USD equivalents). A best guessed currency valuation for the amero would be a six percent appreciation to the present day USD natural trading level to the EUR. That would put the amero say at a natural trading band of about 1.03 to 1.13 amero to the EUR. Fairly close to par. A larger currency zone may also reduce currency volatility in wide currency swings as noticed with the USD since year 2001 from 0.83 USD to 1.49 USD (November 2007) to the EUR.
REGIONAL CURRENCY BLOCS
The world of money is moving towards regional currency blocs, a currency reorganization that is unprecedented in the history of money. What is fuelling this change? The Internet, enhanced global communications, globalization – integration of the world’s largest economies via trade and foreign exchange reserves.
Not since year 1455 when German goldsmith Johanne Gutenberg invented the movable type printing press for mass printing has the world witnessed such a profound change now with the Internet and globalization. The world of money is changing, we saw this recently with the death of currencies through much of Europe with the birth of the Euroland euro. This trend will continue to ultimately the world has only a handful of currencies remaining from the 180 plus currencies presently circulating in the world today.
Our vision at BankINTRO.com is that we think the world will end up with a handful of strong, stable currency zones. In 20 to 30 years, we may have the amero currency union representing North American economies, Japanese yen (JPY), Chinese renminbi/yuan (CNY), the Euroland euro (EUR), Indian rupee (INR), Russian rouble (RUB). Other currency blocs will include the Middle East – a new common currency for the six countries of the Gulf Co-Operation Council (GCC) by year 2010. The Middle East also has the Islamic gold dinar which is currently in use for commercial transactions. An Asian currency union (Philippines, Malaysia, Indonesia, Thailand, Singapore, etc.) – there have been discussions for such a proposal. A South American currency union
(ie. peso union) and/or expansion of the amero to other countries in Latin America? Other zones include the East Caribbean dollar (XCD) for several smaller Caribbean countries, CFA franc (XOF, XAF) currency zone in West Africa for French speaking countries that is linked to the EUR. There have also been discussions for a continental African Union currency to be in use by 2010.
Hypothetical trading valuations may see a currency world where the Japanese yen will be redenominated by 100. Say for example, today’s current valuation is approximately 110 JPY to the USD, a new Japanese currency valuation after redenomination by 100 will be 1.10 JPY to the USD. This may be advised as it may give the sluggish Japanese economy a consumer push, a jump in GDP growth as lots of consumers who are presently holding ‘mattress’ cash will have a time frame to swap the old currency for the new or they may end up buying consumer goods instead of swapping. China’s economy is in a multi-year expansion phase, a long term valuation may see the renminbi appreciate to 2 to 3 CNY to the USD. China is following Japan’s rapid currency appreciation experience during the 1970-80’s whereby the yen appreciated significantly to the USD. The other major trading zone of similar size is the euro zone, a natural trading level is 1.1 to 1.2 USD to the EUR. As stated with the possible inception of the amero, an ideal potential trading band of 1.03 to 1.13 amero to the EUR is possible although the trading range is likely to be greater than the natural band.
The theme of our BankIntroductions.com web site is the threat of currency crashes to the average citizen. Flash back to Argentina 2000-01, Indonesia 1997, Mexico 1994, these examples of currency disarray caused great harm to millions. During history, currency crises have destroyed tens of millions of lives, wars, etc. In our opinion at BankINTRO.com, the emergence of an amero currency union coupled with the birth of other regional currency zones will help to foster in an era of currency stability, peace and prosperity for the world.
MEXICO
Mexico, a key partner in NAFTA is strategically located as it shares a long border with the richest country on earth, the United States. Approximately 85 percent of Mexico’s exports go to America thus helping Mexico to achieve an investment grade credit rating.
Mexico has had a history of currency instability, a national psyche for the fear of another currency collapse. A national distrust of paper currencies that are backed and issued by the Mexican government remains evident today. In 1994, the peso traded at 3 pesos (MXN) to the US-dollar (USD), today that number is closer to 11 MXN after the country went through a currency crisis during the mid 1990’s known as the ‘Tequila Crisis’. In 2005, the Mexican Senate discussed using silver as an anchor currency to help provide for currency stability. China in the 1930’s went on a silver standard, this ended in disaster. Today, the USD is widely accepted in northern Mexico and in Mexican tourist resort areas.
Modern economies today thrive on foreign direct investment (FDI), an amero currency for Mexico would provide for investor stability as Mexico will now have a new hard currency to base economic decisions upon. The implementation of the amero would immediately eliminate the majority of currency risk for investment purposes into Mexico, a new vibrant investment environment of confidence for foreigners to invest hundreds of millions knowing the exchange rate risk is mitigated. An amero currency circulating will provide for that incentive for investors to make the plunge and invest capital well knowing that Mexican management teams can focus primarily on business risk rather than being consumed with currency risk which will no longer be a major factor.
With the amero, Mexico in our opinion at BankINTRO.com will realize a wealth boom, an influx of FDI may indeed perhaps double Mexican GDP from the current 1.2 trillion USD equivalent as measured by purchasing power parity to say 2.5 trillion USD in 20 years of amero currency use. The Mexican banking system will also benefit from currency stability with greater soundness. In fact, it is quite possible that in 40 to 50 years, there may very well be Americans hopping the border to get into Mexico – a bizarre concept that may not be so bizarre going forward a few decades.
However, in order for this to happen, Mexico has much work to do. There is presently too much corruption, too big an underground economy at present and too low a rate of tax collection within Mexico today. Many challenges lie ahead but progress is taking shape. Please read our currency review on MEXICO listed in this BI.C currency index.
The Mexican peso as of December 10, 2007 as measured by purchasing power parity is approximately 30 percent undervalued relative to the USD.
UNITED STATES
Illegal immigration and energy security are two issues that can be better managed with the introduction of the common amero currency. Today, Canada is an energy superpower as Canada holds the second largest oil reserves in the world in addition to world class natural gas and fresh water reserves. Closer economic ties within an amero currency zone will enable Canada to provide for greater energy security for America. Currently, the Canadian provinces of Newfoundland, Saskatchewan, Alberta and British Columbia are energy producing provinces. Mexico itself is America’s number two supplier of crude oil.
The potential for greater political integration within the area of national security and border control will likely provide for enhanced national security for the United States.
At present, those people of Latin American heritage are now the fastest growing population segment within America. An amero currency union will provide Mexico with a significant economic gain. A more prosperous Mexico is the best way to combat illegal immigration, not building a wall. The economic cost of illegal immigration in time may help to move many Americans off the fence to support the concept of a unified currency such as the amero out of sheer frustration.
America does not have a debt problem, current U.S. federal debt to GDP is at approximately 69 percent, in line with several other advanced industrialized countries. Compare this to Japan today which sits at around 140 percent of GDP for their national debt. There are too many pessimists and fear mongers in certain media outlets who have made bashing the USD sport of the day. The fiscal deficit is not a problem, it is actually quite reasonable at 1.5 percent of GDP. The current account shortfall is currently correcting and likely to ultimately to fall to 3 percent of GDP. America is with out a doubt a very powerful economy, a well diversified mega blockbuster economy thriving on entrepreneurial genius that remains the envy of the world. The United States is and will remain an economic superpower even with a mild to deep recession ahead in the short term which is necessary to correct the malinvestments resulting from the domestic mortgage sub prime fiasco. America will prevail, the USD will continue with modest short term exchange valuation pressures, the majority of its current cyclical decline in valuation is now completed.
The USD when measured by purchasing power parity remains undervalued to a large number of currencies including the British pound sterling (GBP), Canadian dollar (CAD), Swiss franc (CHF) to name just a few. If anything, look for a cyclical rebound in the USD in year 2009 following previous consistent bear / bull market cycles in the currency. If the Democrats take control of the White House in 2009, that would be bullish for the USD.
What is likely going forward for the United States? Higher taxes, quite possibly a consumption tax similar to the majority of other advanced industrialized nations. Canada’s current Goods & Services (GST) tax maybe a yardstick for America to follow. Canada’s GST tax has provided the country with fiscal surpluses thus allowing the authorities to lower Canada’s debt to GDP ratio. America is and remains for the most part a relatively low tax nation, a broad based consumption tax would be a huge financial windfall for U.S. federal & state governments as monies will be earmarked for domestic infrastructure upgrades in the decades ahead. A consumption tax will also raise revenue from those segments that do not contribute such as the underground economy.
CANADA
Amero inception for Canada would remove currency volatility and an unnecessary level of currency risk. Canada brings much to the currency table for the amero, secure markets for energy and other valuable natural resources. Today, approximately 85 percent of Canada’s exports are destined for the United States market. Canada relies on America for its national wealth, simple as that.
Canadian management teams have been concerned about the appreciating CAD over the last 5 years from 61.75 US cents in January 2002 to $1.10 USD level in November 2007, 75 percent appreciation of the CAD in relation to the USD. It is time now to let management teams within North America to stay focused primarily on business risk, the amero would eliminate currency risk for those Canadian companies selling goods or services within the North American currency zone. Canadian manufacturing in Ontario and Quebec have been greatly impacted, other industries such as forestry are also feeling the heat. Canadian management teams have been side swiped by currency movements over the last few years, let management teams stay focused on business risk rather than spending their time analyzing currency risk. The appreciation over the last few years of the CAD has cost Canada in excess of 250,000 manufacturing jobs, another 100,000 job losses is forecasted in the next 18 months. Canadian companies have further lost out to their Mexican counterparts over the last few years as the Mexican peso has followed the USD silent crash lock and footstep. So in affect, Mexican companies are stealing market share away from Canadian companies not directly to business smarts, but mainly on currency movements working in their favour.
In a Globe & Mail interview after a Chicago speech in July 2007, Bank of Canada governor David Dodge stated that currency union is ‘possible’ North America one day may embrace it.
Dodge: “only be possible after barriers to the free flow of labour were removed and the structures of the Canadian, American and Mexican economies grew similar”.
The Canadian government has publicly denounced the idea with rejection from Canadian department of finance.
In a December 2007 article reported by cbcnews.ca, incoming Bank of Canada governor Mark Carney said it would be a “mistake” to peg the CAD to the USD.
If an amero monetary union takes hold, Canada would have to abandon an independent monetary policy. So indirectly, its sovereignty over monetary affairs will now be influenced by a new common central bank for the amero zone. Canada with its current ablity to influence economic conditions within our borders will no longer be available with the same direct influence. Canada, a major resource economy has relied on its flexible exchange rate for the CAD to act as a shock absorber during times of low commodity prices to help insulate the economic impact of the commodity cycle. With the amero, this financing option will be mitigated. However, a common currency for Canada has significant economic benefits being further linked directly in with the United States and Mexican markets, a greater wealth gain and an increased standard of living for Canada will likely be the case.
Of recent noteworthy news, there have been reports of illegal Mexican immigration now arriving at the city of Windsor, Ontario. The amero currency in time may help to further alleviate this new trend that is upon Canadian borders.
Of interest, what would be the ideal exchange rate valuation for CAD conversion for amero currency adoption? In our opinion at BankINTRO.com, with the current exchange value of the CAD closer to par with the USD rather than at 65 US cents five years ago, Canada would obviously get a much better bang for the CAD with more purchasing power at today’s exchange rates.
As measured by purchasing power parity as of December 10, 2007, the CAD is 20 percent overvalued to the USD. Long term valuation for the CAD to the USD is at about 90 US cents, a similar GDP/Capita percentage to the United States for Canada at 90 percent.
Drug War – An Example of Political Integration with the Amero
With a common currency, some policies may now be spearheaded by common political force from the North American currency zone political representatives. One such policy that may now be better co-ordinated with a joint strategy following amero adoption is the issue of illegal drug trade and gangs that control its profits. A political synergy to combat illegal drugs may work well within certain elements of political integration. For example, in California today, the production of illegal marijuana in the state according to an article presented by the LATimes.com is that of an industry now larger than the combined agricultural output from the state.
In Canada within the Province of British Columbia, the illegal production of marijuana and trade employs upwards of 150,000 in the province and accounts for the province’s largest industry estimated at 8 billion CAD. However, the BC provincial government is taking prudent action as they have implemented the B.C. Civil Forfeiture Act (May 2006) to seize and sale the proceeds of crime. Those are tax free earnings, drug dealers and producers generally do not file income tax returns reporting their drug earnings. In addition, the minority Federal Conservative government in Canada have just recently announced minimum guaranteed jail times for drug production offences.
In Mexico, it is well known that the illegal drug industry in addition to remittances from the United States is the lifeline to millions in Mexico. Illegal drug production in Mexico for export in America provides for an off the record economic subsidy worth billions. Mexico may benefit more now with illegal drug production being transferred out of jurisdictions like British Columbia where new laws make it less of incentive to produce.
Implementation / Timing for the Amero
Implementation of monetary union for North America with a common currency such as the amero could happen in as early as 10 years, but realistically, more like 20 years out. The concept of the amero currency we believe is in its early stages, a currency debate that may last several years. You know, 20 years ago, former Canadian Prime Minister Brian Mulroney floated the idea of free trade between Canada and the United States. Within 5 years, free trade was a reality followed by the North American Free Trade Agreement that came into law on January 1, 1994.
ON a CNN Larry King show interview in October 2007, former Mexican President Vicente Fox confirmed talks for the proposed idea of common currency for North America, ‘A currency union that may occur in the long term’.
Currency Debate
For Canada, if economic recession takes hold due to currency related movements, only when the people need alternative solutions, then the amero will become more popular for discussion. In America, the amero concept is likely to be unpopular for many at present but this may change as the impact of illegal immigration becomes more of an issue that personally strikes home to many. Further, any decline in the living standard for the average American citizen would help to propel the amero currency union debate. However, our guess is that of the three countries, Mexico is most likely to be in favour of immediate amero discussions.
Here at BankINTRO.com, in our currency opinion, we strongly support the concept of the amero currency as the world moves into regional currency blocs.
In an article that we have kept for research purposes, in a December 2000 interview with Canada’s national daily paper, the National Post, world currency icon Robert Mundell states some important currency concepts as follows as we quote his work directly:
Robert Mundell currency thoughts:
“A large currency area is a better cushion against shocks than a small currency area, just as a large lake can absorb the impact of a meteor better than a small pond. The euro (assuming sound monetary policy), will be a much more stable currency area than any of its component national currencies. Similarly, at equal inflation rates, the US dollar is a more effective currency than the Canadian dollar or the Mexican peso, and a North American monetary union, whether based on the US dollar or a new unit (such as Herbert Grubel’s plan for an ‘amero’), would be a more stable unit than any of the national currencies alone.
Adjustment between regions of a common currency area is painless and apparently effortless because it starts to take place as soon as a problem arises and it is implemented smoothly and efficiently until adjustment has been completed. Exactly the same ease of adjustment is possible between areas with firmly-fixed exchange rates. If, for example, Canada formed a monetary union with the United States, or dollarized, or fixed its dollar firmly and irrevocably to the US dollar, the two countries would share the same inflation rate and adjustment between Canada and the United States would be just as easy as it is between California or Puerto Rico or Panama and the United States.
Trade between areas with a common currency or a firmly-fixed exchange rate is higher than that between areas separated by flexible exchange rates because exchange rate uncertainty imposes a cost of trade much like a tariff. If the fifty states of the United States has separate currencies connected by flexible exchange rates, the real income of the United States would plummet. By the same token, if Canada and the United States shared a stable common currency or an irrevocably fixed exchange rate Canada’s real income would soar, closing a large part of the gap between the two countries’ GDP per capita.
When a country firmly fixes its currency to a large and stable monetary leader (such as the dollar or euro areas) it gets a rudder for its monetary policy, a stable rate of inflation, and discipline for its fiscal policy (budget deficits are anathema to fixed exchange rates). In addition they get the bonus of being a member of a large currency area that is a better cushion against shocks.”
A Robert Mundell quote that we note of interest, also from the December 2000 interview with the National Post from Canada:
“If Canada had the same currency as the United States and a genuine free trade area, Canadians would have as high or higher a standard of living as the average American.”
Our best guess is that we are at the beginning of a heightened currency debate that will last several years, perhaps 5 to 15 years, followed by a negotiation phase that may last 3 to 5 years followed by a 2 year currency implementation in similar framework to inception of the Euroland euro.
The concept of an amero currency will move towards a nasty, divisive, ugly and a very political currency debate to take hold within North America. The amero will help to solve a lot of problems, when it is in each country’s benefit, then the amero will emerge. Many American’s will feel their patriotism invaded, their sovereignty under attack, expect a lively currency debate that will rival images of the War of 1812 between the United States and Canada.
To summarize, a common currency and free trade zone will boost the standard of living for Mexico, the United States and Canada with a common currency, the amero. The benefits to our way of thinking greatly outweigh the concerns.
