differences of opinion about the appropriate definition of price stability or how quickly to return to the target inflation rate when unanticipated events cause a deviation from the target. more importantly, with a common currency, individual countries can no longer benefit from having their national currency operate as a buffer in the event of an economic shock. take the case of a sharp rise in world energy prices. in this instance, an energy - producing country would experience rising incomes, expansionary demand pressures, and perhaps increased capital inflows. countries that are heavy users of energy would experience the opposite effects. exchange rate movements can help smooth the economic adjustment to such a shock, through a rise in the currency of the energy - producing country and a decline in the currency of the energyimporting country. where exchange rate movements are not an option, as within the current euro area, greater price and wage flexibility or greater worker and capital mobility between national economies will be needed in response to the shock. otherwise, the adjustment will be more painful and costly, involving greater fluctuations in national output and employment. europe is still characterized by significant wage and price rigidities and by low worker mobility, which could make the adjustment to shocks more difficult. evidently, the hope is that participation in the currency union will act as a catalyst for action to reduce or eliminate these rigidities. the economic case for a common currency in europe rests mainly on a judgment that buffering differential shocks in the partner countries will be a less important consideration than the benefits from lower transactions costs and from the greater economic certainty because of reduced currency risk. this presumes that the economic structures of these countries are sufficiently alike that any shocks will be felt by all of them at roughly the same time and to a similar degree. a good number of the euro countries probably fall into this category. those that do not may find themselves having to adopt measures to increase price and wage flexibility, as well as encourage worker and capital mobility, to take the place of adjustments in the exchange rate. what are the implications and relevance of the european currency model for canada? canada ’ s trade links with europe are relatively modest. only 4 % of our exports go to euroland countries and about 7 % of our imports come from there. so the direct economic effects on canada from any developments in europe related to the move to a common currency are likely to be rather limited, at least in the short run. of course, should the new monetary union lead to changes in world trade and finance

over time, canada would feel an impact, like any other country. but it is difficult to assess the likelihood and extent of any such changes. in the meantime, i hope that canadian businesses trading with europe have made the adjustment to the new currency and are seeking to benefit from the lower costs of operating in europe that go with it. – 4 – one thing that the launching of the euro has done in canada is to generate discussion of the notion that we should be thinking of a north american monetary union with the united states ( and perhaps mexico ). the decline in the external value of the canadian dollar over the past year has, no doubt, heightened interest in the issue. before i get into the arguments, let me remind you that we are talking about a currency union, not just a fixed exchange rate. fixed rates that can be adjusted ( that is, devalued or revalued ) do not eliminate exchange rate uncertainty. indeed, as we have seen recently in asia, in mexico in 1994, and in europe in 1992, when adjustments are resisted, fixed exchange rates can become unsustainable. to obtain the economic benefits that i described earlier, a currency union, not just a fixed exchange rate, is required. * but, as i have also noted, even with a currency union the economic benefits come at a price. and that price is the loss of a degree of political and economic autonomy and flexibility. just how significant would that price be for canada? it is important to remember that, in the case of euroland, the monetary union is a considered, conscious choice that fits into the long - envisioned larger plan of greater economic, social, and political integration. but in north america, there are no parallels to these profound political forces. nor does nafta entail the degree of economic integration involved in the european union. moreover, for canada, any monetary union one might imagine with the united states would not only result in a loss of autonomy over monetary policy but would work very differently from the european monetary union. in europe, there are three large partners of roughly comparable size and eight other medium - and smaller - size participants. any north american monetary arrangement would most likely mean that canada would have to adopt the us currency. for canada, the other major problem with a single north american currency is that we would be giving up the buffer that a flexible exchange rate provides in dealing with shocks that affect us differently from the united states. an important contrast between canada and