Competing monetary regimes are facing the same pressures global industries must. The cost of supporting a monetary regime weighs against competitive efficiency in capital and goods markets. Indeed, the dominant position of the U.S. dollar is enough to have tradition bound exchequer look across the Atlantic as a viable alternative to a marriage with the rest of the EU. Ted Hall of Mayacamas Associates makes some compelling arguments in his WSJ piece (April 11, 2006) for the dollarization of sterling, but his points remind us that Canada is even more positioned to adapt to dollarization. He states his case:
There is much at stake in the U.K.'s choice. Adoption of the dollar would eliminate exchange rate risk, improving risk-adjusted returns for all asset classes. More venture capital would stay in the U.K. (and flow to it from the U.S.), stemming brain drain and fostering a more innovation friendly environment in the U.K. The cost disadvantage and illiquidity premium associated with participating in a $40-trillion pool (euro zone plus the U.K.) will be significant compared to participating in a 40% larger $56 trillion pool (U.S. plus the U.K)
Canada would benefit in the same way should it negotiate a currency union - likely dollarization. The impact on our economy would be significant, in all the ways described above. Perhaps the arousal of a dollarization debate in the U.K. will bring our monetary regime some policy focus for Canadian politicians, business leaders, and, most importantly, ordinary Canadians. Certainly, U.K. dollarization would make the issue fait accompli in the Great White North. The loonie is dead with sterling dollarization.
Just as the U.K. must face this challenge to its monetary traditions, our current Canadian monetary regime demands a debate about its future. The sooner the better.
