IAUGUST 2000, PRESIDENT-ELECT VINCENTE FOX OF MEXICO VISITED THE UNITED STATES AND CANADA. HE FORWARDED SEVERAL IDEAS REGARDING THE FURTHER INTEGRATION OF THE THREE ECONOMIES THAT CONSTITUTE THE NORTH AMERICAN FREE TRADE AGREEMENT, OR NAFTA. AMONG HIS PROPOSALS WAS AN EVENTUAL SINGLE CURRENCY FOR NAFTA MEMBERS.
The idea of a single currency for the United States, Canada, and Mexico is not new and has usually referred to one of two approaches. The first, and most discussed, is the unilateral adoption of the U.S. dollar by Canada and Mexico, otherwise known as dollarization. Dollarization has been advocated for not only Canada and Mexico but also many other countries in the Western Hemisphere (Hausmann 1999; Schuler 1999). Some Latin American countries are already dollarized: Ecuador unilaterally dollarized its economy in September 2000, and Panama has employed the U.S. dollar as its currency since 1904. Monetary union is the other interpretation of the single-currency idea; that is, rather than unilateral adoption of the U.S. dollar, a joint currency could be developed and managed by a number of countries. This article examines the idea of monetary union in North America. Specific criteria for a single currency for North America are discussed, as are the pros and cons of a monetary union and dollarization in the North American context. On the basis of optimal currency area (OCA) criteria, the article concludes available evidence suggests that a single currency for NAFTA countries is possible. Canada appears much more suited for joining the United States in a singlecurrency arrangement than does Mexico. Mexico appears to be moving closer to fulfilling OCA criteria, however. The article also concludes that monetary union appears to hold several advantages over dollarization from the perspective of both the United States and its NAFTA partners. Although monetary union in North America is not likely to be a near-term development, it is an important idea that merits further study and consideration...