As we reach the 20th anniversary of CER, it is common to find business people wondering aloud whether the time has come for New Zealand and Australia to adopt a common currency.
Even three years ago, when Sir Frank Holmes and Dr Arthur Grimes published a study on this idea, 58 per cent of the 400 companies they surveyed favoured a common currency for the Australasian countries, with only 14 per cent opposed to the idea.
And when the Australian Treasurer spoke in Auckland late last month he asked “If the 12 countries of Europe… have a single currency, is it so hard to imagine a single currency across the Tasman? The answer is no.”
The recent strong appreciation of the New Zealand dollar against the Australian dollar has heightened interest in the business sector in finding some way of avoiding swings in the relationship between the two currencies.
The National Party has reached no conclusion at this stage about whether a currency union with Australia is something which might help New Zealand’s growth.
It is pretty clear that a currency union would reduce transaction costs for businesses trading with Australia, and for New Zealanders travelling to Australia. And by eliminating uncertainty about the future of the cross-rate between the two currencies currency union would be quite likely to increase trans-Tasman trade. There is plenty of evidence that small companies find dealing with that uncertainty very difficult to deal with. So there would be some clear benefits from a currency union.
But it would be important before any decision to form a currency union with Australia was taken that the costs and the risks were also assessed realistically.
Research undertaken by Westpac Bank last year suggests that the exchange rate between New Zealand and Australia acts as an effective macroeconomic shock absorber. If that exchange rate were “superseded by some form of currency union then its shock absorber properties would be lost. To compensate, real resources (i.e. labour and capital) would need to move more between the two countries in response to economic shocks.”[1]
Moreover, although Australia is New Zealand’s largest trading partner, it still takes less than 25 per cent of our exports, and provides less than 25 per cent of our imports. This means that, while a currency union with Australia would eliminate currency uncertainty for New Zealand companies trading with Australia, companies trading with the rest of the world would still face considerable exchange rate uncertainty.
But wouldn’t an Australasian currency be less volatile than the small New Zealand currency? Certainly, the Australian dollar has been a bit less volatile than the New Zealand dollar over the last 10 years or so, but there is no reason to believe that that situation will continue in the future. Over the last decade, the New Zealand dollar has experienced some quite big swings against the currencies of our trading partners but, contrary to popular belief, those swings have by and large not been any greater than the swings experienced by much larger currencies, such as the yen, sterling and the US dollar.
There is some risk that factors peculiar to the Australian economy might push any Australasian currency up (perhaps strong export prices for iron ore, wheat and uranium) at the very time when a weak currency might be helpful to cushion the New Zealand economy from an adverse shock (perhaps a sharp fall in dairy and meat prices). This is the risk in any large currency area, even one which coincides with a national boundary, but at least within a national boundary resources are usually able to move fairly easily from a subdued industry to a buoyant one, while fiscal policy can also provide some automatic cushion.
Perhaps most important of all it would be important to be realistic about what a currency union could deliver. Some people imagine that it could quickly give us all an Australian standard of living. A quick look at Tasmania should disabuse us about that. Fundamentally, our standard of living is dependent on the productivity of New Zealanders, and that in turn depends on the skill of our workforce, the ability of our managers, and the quality of domestic policy.
Finally, while we talk about a currency union with Australia – implying a single central bank with directors from both countries, making decisions in the best interests of both countries – the reality is that Australia is unlikely to be willing to abandon its own currency to accommodate our preferences. This almost certainly means that any “currency union” with Australia would take the form of New Zealand’s adopting the Australian dollar, with monetary policy being made for both countries by the Reserve Bank of Australia with a primary, and perhaps an exclusive, focus on the needs of the Australian economy.
It might still be a sensible thing to do in terms of New Zealand’s own interests, but at least to me the case for doing so remains unproven. We may have a better idea about the pros and cons in a few years time, after the euro has been operating in Europe for a longer period.
[1] “Explaining the NZ-Australian exchange rate”, an occasional paper by Paul Conway and Richard Franulovich, Westpac Institutional Bank, April 2002, p.1.
Copyright © 2024 Don Brash.