Looking at what’s going on in Europe, I’ve been wondering for some time what the hurdles/consequences of further economic and infrastructural integration between the US and Canada would be. There is already a lot of it, for instance, I don’t have to dial a country code to get to Canada - just dial like I would anywhere else in the US. Obviously, I’m ignoring issues of national pride and not wanting to give up sovereignty, etc., since this is all just idle speculation on my part.
A couple of issues that I’ve specifically speculated on:
Postal service unification. Are there any significant differences between the two systems that would be difficult to overcome? I don’t think any of the two letter state/territory abbreviations overlap. I do realize that the ZIP/Postal codes are in different formats (US, pure number; Canada, number/letter combo), but is this really a big problem? Are there any significant procedural differences in the way the Canadian and US postal services are run? Would there be any efficiency or cost benefits to integration?
Currency unification. Again, let’s ignore issues of national pride and sovereignty, what are the structural hurdles? The US has the Federal Reserve system (which I think works extremely well), does Canada have an independent Central Bank? Could the two be integrated fairly easily? Would the financial situations of either Canada or the United States make unification a bad idea for either country? Would there be any real benefit?
Canada has a central bank, and operates similarly to the U.S. And the U.S. and Canadian dollars are actually quite close in value right now. So it wouldn’t be that hard to unify the currency. The question is whether you really want to. Floating exchange rates between countries are very valuable, because they allow relative values of currencies to change based on changing economic conditions. For example, Canada has been running surplus budgets for years, while the U.S. runs big deficits. The result has been a natural closing in values between the currencies. Back when Canada was the one running huge deficits, the gap widened. This communicated valuable information to the market on the relative strength of our economies.
Canada used to peg the value of the dollar to the U.S. dollar, as did many other countries. A Canadian economist won a Nobel prize by showing that floating exchange rates are more economically efficient, and the world changed. Going back to unified currencies is a step in the wrong direction.
But in general, there will be more unification. For example, if we could work towards eliminating the reasons for a guarded border, it would have tremendous consequences. Moving between the U.S. and Canada should be as easy as moving between New York and New Jersey. That would mean unifying our laws somewhat, especially gun and drug laws, and getting rid of all tariffs. It would also mean having a joint framework for immigration control and port security. But the fact is, as any risk player will tell you, controlling the points of entry into North America is a lot easier than trying to defend a border thousands of miles long. So from a security standpoint, it makes a lot of sense.
And the EU is already running into trouble with its common currency.
For example, let’s say Canada goes into recession, but the U.S. economy is burning along at a rate that threatens inflation. The correct monetary response to recession is to lower interest rates to stimulate the economy. But the correct solution to an overheating economy is to raise interest rates to choke off the money supply. But if the two countries share the same currency, the fix for one results in damage to the other.
Another example is deficit spending. Ultimately, deficit spending should cause a rise in interest rates and a devaluation of the currency. If you have two countries sharing the same currency, then the reckless spending habits of one country negatively impact the other. That’s why the EU had to put hard debt limits on member nations who wanted to share the Euro (and of course which France and Germany promptly ignored).
The case for the Euro is that when you have so many small countries crowded together, the frictional costs of separate currencies for each one are high, and this limits trade and economic efficiency. The decision was made that removing this friction would be of a greater benefit than the loss of fiscal autonomy would cost. I’m not sure this is correct, and I suspect the Euro is heading for trouble down the line. But in any event, what may be necessary for a large collection of countries bound closely together does not have to be even closely correct for a case of two countries sharing one border.
The only way a common currency would make sense for North America would be if we tied together our fiscal houses very closely, by agreeing to various spending limits on government, debt limits, regulatory limits, etc. We’d have to move close enough to be relatively indistinguishable from being one large country.
Perhaps that’s where we’ll wind up. Perhaps fifty years from now the Canadian provinces will be more like American states except with slightly more autonomy. But as long as Canada makes its own spending decisions and taxing decisions, it should maintain its own currency.