INTRODUCTION

We now turn our discussion to the Americas and examine the prospects for monetary integration in the northern and southern hemispheres. Canada and Mexico have floating exchange rates, which are often described as the best regime for a country in bed with an elephant – the huge U.S. economy. It is important to know, however, just how much economic insulation Canada and Mexico have actually enjoyed, and whether NAFTA has changed the situation – the claim made by some Canadians who advocate monetary union with the United States or adoption of the U.S. dollar. For Mexico, a key issue is whether growing competition from China strengthens or weakens the case for tighter monetary integration with the U.S. dollar.

This chapter also looks at whether MERCOSUR should take steps toward an internal monetary union – one that would not include the United States. The recent addition of Venezuela to MERCOSUR, along with leftist anti-American sentiment in several other countries, may revive the quest for a single currency. The composition of MERCOSUR's trade, however, will influence the economic benefits, costs, and possible strains arising from a monetary union. To the extent that financial dollarization has already occurred, moreover, use of the U.S. dollar may impede prospects for an internal monetary union. We thus compare the benefits and costs of internal monetary union with those that would result from unilateral dollarization.