The idea of a shared currency between Australia and New Zealand is not new and has engendered discussion over the past two decades. It has recently come to the forefront as a result of our Prime Ministers asking their respective Productivity Commissions to conduct a joint scoping study on strengthening trans-Tasman economic relations.
The Commissions’ final report is due 1 December this year for discussion between leaders in 2013, representing 30 years since the Australia New Zealand Closer Economic Relations Trade Agreement (CER) came into effect.
The terms of reference for the review asks the Productivity Commissions to address potential areas of further economic reform and integration, the economic impacts of reform, transition costs of reform, how to implement reforms and the likely time paths involved. The idea of a shared currency between New Zealand and Australia is not in the terms of reference, but it has become a topic of discussion and apparently business favours the idea.
The idea of a shared currency has been discussed for over 20 years. In 1991, the Reserve Bank Bulletin provided a preliminary examination of the real economic impacts of a currency union between Australia and New Zealand. It suggested that potential benefits arising from currency integration might include encouragement of monetary discipline within the currency union, reduction in transaction costs between member states and greater exchange rate stability as the result of creating a larger currency.
Potential costs included transitional costs of converting to a common currency, loss of sovereignty and independence of economic management, restricting member states’ ability to respond to unanticipated shocks (the current debt and Euro crisis in Europe comes to mind) and exposure to external shocks if the currency union imposed an exchange rate that did not reflect the conditions faced by individual members.
Monetary policy was not addressed in the 1991 report and similar issues seem to be at play in 2012. So what are the current issues?
What would the currency be called?
The trans-Tasman Dollar and the ANZAC dollar are both options, as is keeping the Australian dollar. The naming of the currency would provide great debate, and I feel sure it would lead to a great deal of cynicism and humour. How would this be handled socially and politically in the respective countries?
Trade between Australia and New Zealand
Australia is New Zealand’s largest trading partner, but New Zealand ranks as only Australia’s fifth largest trading partner, suggesting an imbalance. It would be difficult to know whether this would cause concern in the creation of a single currency.
The relative economic cycles of each country would have to be considered. If business cycles and economic changes affect countries differently, there may be costs in not having an independent exchange rate. As an example, Australia’s economy is currently strong; New Zealand’s is not as strong. It is suggested that Australia’s economy is moving towards consolidation at best and slowdown at worst, whereas New Zealand’s economy is moving towards modest recovery.
These are two different economic cycles, with each country relying on different sectors of the economy. Australia is focused on mining, whereas New Zealand is focused on agriculture. What would happen if metal prices increased and Australia had to control inflation with higher interest rates whilst agriculture or the level of inflation in New Zealand did not experience that same growth?
This would suggest that one country may benefit more than the other country with the introduction of a common currency. Another issue is the effect of Australia’s current two-speed economy.
The stronger party: who would it be?
Australia has a larger economy than New Zealand. Is it likely that Australia would want to be an equal partner? There are issues of control of the central bank, the exchange rate, tariffs and each country benefiting equally. Would the politicians of either country be prepared to hand over existing powers? What would be the political fallout in terms of the polls? Perhaps a referendum would need to be called to reduce the impact of political fallout. This suggests that it will be some time before a shared currency could come into existence.
A shared currency and the political climate
Politicians and regulators views have changed over the past decade. In 2000, New Zealand’s Prime Minister, Helen Clark, was reported as suggesting that a shared currency was inevitable. In 2009, the New Zealand central bank governor suggested that it was looking unlikely. In 2007, John Key (who was to become Prime Minister of New Zealand), suggested that the idea was worth pursuing, but as Prime Minister in 2009 he suggested that the a common currency was unlikely.
In 2011, Australia’s Prime Minister Julia Gillard suggested that a single economic market was desirable, but she had no focus on pushing for a single currency. The idea of a shared currency seems to ebb and flow.
New Zealand participated in the discussions about federation of the British colonies during the 1890s. New Zealand did not join, but the Australian Constitution contained a provision describing the terms under which New Zealand could join for 100 years after Federation. This expired in 2001.
Could you imagine New Zealanders wanting to give up their sovereignty? It would certainly make for stronger cricket and rugby teams and more gold medals at the Olympic and Commonwealth games for a collective country. Yet somehow I don’t think the population of New Zealand is yet ready to give up their sovereignty, which is how they might feel if a single currency regime developed.
Furthermore, I doubt that the politicians have the will to test this. Nevertheless, the issue will no doubt remain on the table for further years to come; the report currently commissioned is a sensible strategy in light of global economic trends.
In the short term, with views that the European currency is a failed experiment - described sometimes as an elaborate Ponzi scheme worth billions of dollars that is about to end - I think that the idea of a common currency will proceed slowly rather than with haste.