NEW YORK (CNNfn) - As Europe's single currency prepares to celebrate its eight-month birthday, the big debate about dollarization -- the adaptation of the U.S. greenback as the official currency of other countries -- is once again taking center stage.
This time around, though, it's U.S. senators and other government officials who are calling for countries - particularly Latin American nations who are already struggling with skyrocketing deficits and runaway inflation - to adopt the U.S. dollar.
Speaking earlier this month to a joint congressional subcommittee on economic policy and international trade and finance, U.S. Republican Senator and Chairman of the Joint Economic Committee Connie Mack said that allowing Latin American countries to adopt the U.S. dollar as their official currency would help stabilize prices and raise U.S. living standards.
Other members of the committee also chimed in, praising the idea of different central governments abandoning their national currencies for the U.S. greenback.
Removing 'daunting' obstacles
Not only will adaptation of the dollar help benefit those countries whose currencies blow in whatever direction financial markets want them to, it will also help the U.S. by lowering business transaction costs and providing financial and political stability.
"Dollarization would remove one of the most daunting obstacles for the development of Latin American economies - their protracted instability and propensity to exchange-rate fluctuations," Manuel Hinds, a former minister of finance for El Salvador, testified to the subcommittee.
That's a far cry from even a year ago, when U.S. officials looked on dollarization in the Americas as, essentially, a waste of time.
In a speech made last November, Federal Reserve Chairman Alan Greenspan said "it is questionable whether a sovereign nation, otherwise inclined to economic policies that are 'off the wagon,' can force itself into 'sobriety' by dollarization."
Other U.S. leaders also either dismissed the notion of helping Latin America latch itself on to the back of the greenback or simply ignored the issue altogether in favor of something more sexy, like gun control or tax cuts.
In a speech on that very same topic to the Senate banking subcommittee, U.S. Treasury Secretary Lawrence Summers took a more middle-of-the-road approach. He told the committee that, while there's pros and cons to dollarization, any move by the U.S. to venture down that path would be limited.
'not, in our judgment, appropriate'
"It would not, in our judgment, be appropriate for the United States authorities to extend the net of bank supervision, to provide access to the Federal Reserve discount window, or to adjust bank supervisory responsibilities or the procedures or orientation of U.S. monetary policy in light of another country deciding to adopt the dollar," he said.
But it's not ruled out, either, he said.
Does that mean that eventually the U.S. dollar will reign from Caracas to Calgary?
"There are a lot of reasons why, looking further out, a broadened base for the U.S. dollar would be positive," said Warren Bailey, an economics professor with Cornell University. "It would be good for the U.S. because it will make those countries more prosperous, more responsible, more stable. At the same time it does make us more responsible for them, which is a pretty big task to take on."
The countries that are publicly debating adopting the U.S. dollar as their official currency are Argentina, Venezuela, Guatemala and Ecuador. Unofficially, Mexico has toyed with the idea, according to analysts and economists, though it has never seriously considered the issue.
The fact that some countries are even discussing it publicly is a huge psychological step, particularly for a group of countries that are historically nationalistic, says Bailey. At the same time, their willingness to move toward dollarization in some form suggests the vitality of their economies is taking more precedence than before.
The oft-forgotten land to the North
"On its face, it takes power away from those governments to control their economies, to manipulate their currencies, to adjust their levels of employment," he said. "It's good if they're signaling that there will be no more funny games."
And, economists say, establishing dollarization now could avoid some nasty competition later. The possibility of a single currency in Mercosur - the customs union comprised of Argentina, Brazil, Paraguay, and Uruguay - has not been ruled out.
There's also that oft-forgotten country to the north -- Canada -- whose citizens have watched the value of their currency deteriorate to successive record lows against the U.S. currency during the past two and a half years.
North of the 49th parallel, economists and professors alike have long debated the pros and cons of abandoning all their "loonies," "toonies" and colorful funny money for the safety and security of the almighty U.S. greenback.
"It's always been a contentious issue, though both the Ministry of Finance and the Bank of Canada, for the record, have said they're against a common currency," said Rob Palombi, a senior analyst with Standard & Poor's MMS in Toronto. "I think over a very long time you'll see an amalgamation of currencies, but that's a very long way away."
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Others, though, don't agree. They think Canada is mature enough after 132 years as a nation to keep its own currency and set its own interest rates and monetary policy independent of the almighty Fed.
"Can Canada sit on its own? I think so," said High Frequency Economics' Weinberg. "Investors would still have enough confidence in Canada and its policies to treat it separately," he said.
Because the U.S. is the largest and most influential economy, it doesn't need to offer a premium to attract investors to its shores. Unlike other countries that are required to pay exorbitant rates of interest to entice investors, the U.S., for a long time, has been considered a safe haven.
Canada is still working on that one. Back in 1998 when the Asian financial flu looked poised to hit North American shores, the Canadian currency hit an all-time low of 63.08 U.S. cents, prompting the Bank of Canada to raise interest rates an unprecedented 100 basis points to restore investor confidence.
Appreciation of the U.S. dollar over Canada's in the past five years
Mexico has had similar problems. Who can forget the 1994 Mexican peso crisis when just-elected Mexican President Ernesto Zedillo was forced to ask the U.S. government to help stem the onslaught against his country's currency. The Banco de Mexico, the country's central bank, was also forced to raise interest rates into the double digits to entice investors to return to the country.
Another issue altogether with dollarization -- one currently being experienced first-hand by Finland -- is having less control over your economy.
As a member of the 11 group of countries that comprise the EEU, Finland is having a tough time getting its economy in gear. It can't lower interest rates because it doesn't control them anymore -- the European Central Bank does. It can't adjust the flow of currency because transactions are now in euros.
Will it actually ever happen?
What it can do is adjust its fiscal policy -- ridding itself of deficit, slashing its debt, cutting costs -- to make itself more attractive to outside investment and boosting the number of euros that enter its tiny economy.
One the one hand, that's a step in the right direction, because it forces countries to clean up their books. On the other hand, it's the most blunt of all economic instruments and does not allow for effective management of the economy, said Bailey.
So talk in Washington and academic circles of forging a common currency among the Americas is once again heating up. If other countries forge a bond with the U.S. they will be forced to change their economies to better fit with the U.S. -- something most investors would likely deem a change for the better, proponents say.
Those against the idea look across the Atlantic to Europe, where eight months of a euro that doesn't even exist as a hard currency yet has caused confusion and disruption.
"If you just integrate the money but don't free up integration and investment, it won't ever work," said Bailey. "If other countries are given a say in how the Fed does its job, if investment back and forth is encouraged and expanded, it would mean a lot more stability over a much wider area, which would be very positive.
"That's why they're talking about it in Washington," he said. "Whether it ever happens is an entirely different story." 
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