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Have your say: Should New Zealand form a currency union with Australia?
August 19th, 2009Prime Minister John Key was asked at a luncheon address in Melbourne today if he wanted to see a Trans-Tasman currency union. Key said New Zealand needed to have an independent monetary policy and keep its own currency, but he left the door ajar slightly.
Here’s what he said:
“My view is it is unlikely that it will happen, but it’s not an idea without some merit,” he told delegates at a Committee for Economic Development Australia function, AAP reported.
“The reason I don’t think it would happen is not actually because of parochial, political reasons,” he was reported as saying.
“I think it’s because then again you have to abandon, from New Zealand’s perspective, control of monetary policy.”
Mr Key said New Zealand needed to retain its fiscal independence in case of an economic catastrophe, such as an outbreak of foot and mouth disease.
Only then could there be an enormous correction in currency to try to offset “economic carnage”, he said.
“As an example, you’ve seen in Ireland at the moment the challenges that they’re having where they’re part of the European Union, the currency’s the Euro and they really can’t get the currency depreciation that they need to kick-start their economy.”
What I think
I’m no fan of currency unions. They jam together economies that have different cycles and structures and slam a single interest rate over them. They also completely separate monetary policy from the governmental and parliamentary process, particularly in the short term and when there isn’t one dominant economy. When there is one dominant currency in the union then the minor players have no real say.
We would definitely be the minor player in an Anzac currency union.
Our economy is different from Australia’s. Our commodities are soft ones such as dairy, wood, fish and meat, while Australia’s are hard commodities such as iron ore, coal, copper, gold and nickel. We also wouldn’t gain any great stability by forming a currency union because the Australian dollar is just as volatile as ours.
Key is right when he points to the Irish and Spanish problems within the Eurozone. Their interest rates were too low during housing booms and now they are too high during economic depressions. They can’t use their currencies to soften the blow.
There may be some marginal benefits in avoiding all the foreign exchange transactions and reducing some of the currency risk for importers and exporters with our largest trading partner. But it’s only marginal.
However, we may not have a choice in the matter.
No one has really thought about this publicly, but it bubbles below the surface behind closed doors in cabinet rooms and board rooms.
There is a brutal fact most New Zealanders don’t understand. New Zealand’s financial system and therefore its economy is underwritten by Australian savers and ultimately the Australian government. This was made abundantly clear over the last 12 months. When Australia guaranteed both bank retail deposits and wholesale bond issues New Zealand had no choice but to follow.
During that frenzied yet frozen period on international credit markets in September, October, November and December last year, our banks were unable to raise longer term funds themselves on international markets. They had to rely on funding from their parents in Australia, who were able to use their government’s guarantee to raise funding offshore.
As the big four banks looked to strengthen their balance sheets to keep their coveted AA credit ratings they asked Australian shareholders for fresh capital. This is another untold story here. These banks have collectively raised A$20 billion in fresh capital with little trouble from the funds in that amazing compulsory pension system. Our capital markets could never have done that.
If New Zealand were to pursue policies that trashed our credit rating and currency then the Australian banks would very quickly lobby both our government and the Australian government to stop it. Also if there came a point where our banks were taking on too much foreign debt and getting too big then the Australian banking regulator (APRA) would clamp down on their growth. Luckily for us and APRA our Reserve Bank is equally vigilant.
This reliance on the Australian underwriting of our financial system means we have little leverage in a crisis. Whether we like it or not, Australia would have every right to ‘take over’ our currency if it felt its banks were being put in danger.
Your view? We welcome your comments below
Tags: Australian dollar, Have your say, John Key, NZ dollar, Trans-Tasman currency
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August 20th, 2009 at 8:53 am
Why should we allow our currency to be mainly a speculators playground, rather than a trading currency?
Bring back a fixed exchange rate, with just the occasional review.
August 20th, 2009 at 8:55 am
Keep wages lower in Aus terms. but have Aus dollars for easy trade and travel.
That way it keeps us compeditive internationally with lower wages.
It would help with wide flucutations???
August 20th, 2009 at 9:04 am
Every time I do work for Australian companies I basically don’t know how much I will be paid. The lag between doing the work, invoicing, and then being paid can allow the currency to move as much as 10%. Add to that another 2% in bank margins and fees and it is a fairly hefty cost to doing business. I think this is a huge price to pay and is probably one of the reasons NZ is slipping further behind Australia. I would welcome a currency union.
August 20th, 2009 at 9:29 am
Seems to me that our currency is as you say relying on guarantees from our major shareholders the Aussie cousins,and they`re similarly reliant on outside fundementals for their currency.Sought of swim with Aus,or sink by ourselves.Wether we could go back to pre Douglas “reforms”,is not an option as we`re in the murky river of global money river.
How I wish we could say stuff it to the rest of the world,but don`t see my kids,or theirs wanting the reflectively idyllic NZ of the 60`s
August 20th, 2009 at 9:29 am
If the argument against currency union is that different economic cycles bring different pressures to bear then logically ,Oamaru will have a different currency as well ,maybe the West Coast Grunt could replace the WeeWee Dollar. Its all politics,and power to the holder of the whip and without doubt and without a whimper of objection the day will come we will run to OZ and plea for union. Feeding the masses with “a chicken in every pot” will certainly exhaust our borrowing ability. If commercial exchanges of value were to have free hand and not political power then we would never have left the States of Australia.
August 20th, 2009 at 9:43 am
Simple solution….JUST JOIN AUSTRALIA….if they will take us !!
August 20th, 2009 at 9:51 am
kin : Australia can nick off ! We are a proud independent nation , and don’t need to ride on anyones coat-tails . Our currency is a tool to use for our economic benefit . Lose that , and you lose control of your destiny .
August 20th, 2009 at 10:21 am
Ireland and Spain are having to resort to defllating wages to regain competitiveness which is proving to be extremely painful. The UK on the other hand have simply printed money to depreciate the currency. Furthermore any time the currency looks like it is sneaking upwards, the BoE announces another round of money creation to bring it back down again. This is starting to cause some friction within the EU as the UK are seen to be taking the soft option of free riding behaviour.
It would be very unfortunate for NZ’ers to sacrifice the benefits of monetary sovereignty particularly in extremis for the advantages of a common currency with Australia.
August 20th, 2009 at 10:47 am
Why don’t we just invade OZ? It will be a short war! We can be back by Christmas! And think of all the resource we can get?! The US would have to get involved then we can sue for peace and have Halliburton and KGR rebuild NZ for free. We would get new roads, internet, etc. It’s a Win-Win!!
*The motto could be we have to invade them over there so we don’t have to incorporate them here*
August 20th, 2009 at 10:49 am
Australia would not want us –we have nothing to offer from their point view. I think SimonD has it right.
James –why don’t you forward cover your expected receipts when you agree to the work. ( I presume you are happy with the FX rate at that time ).
August 20th, 2009 at 10:57 am
Matt Nolan at TVHE has good piece on this here
http://www.tvhe.co.nz/2009/08/20/nzaussie-optimum-currency-area/
cheers
August 20th, 2009 at 11:04 am
oh moi gode – you keewee must be keeding that we ossie will want the same muneey
August 21st, 2009 at 9:40 pm
In my opinion New Zealand should not form a currency union with Australia because both have a different economy. No stability is shown in this deal.
August 21st, 2009 at 10:09 pm
A Friday smile:
Inflation is coming soon. So let us print a 500 dollar note for both countries NZ/ AU. On one side the picture of a Panda Bear on the other the one of Moa- tse tung.
To remember him ? Hu is the new leader of China ?
http://www.youtube.com/watch?v=DZA4J1f_NFw
August 23rd, 2009 at 5:04 pm
A Sunday smile:
New Zealand 19 : Australia 18
Inflation is coming soon. So let us print a 500 dollar note for both countries NZ/ AU. On one side the picture of Kiwi Dan Carter on the other the one of “Aussie” Robbie Deans.
September 7th, 2009 at 12:04 pm
General ccy volatility misses the point. What matters is ccy volatility with ones largest trading partners. And Australia is our largest trading partner making ccy union ideal.
The Europeans consider 40million people insufficiently large to be an optimal ccy area and therefore have created a larger zone of 800million. Yet NZ seems to think that 4million is an optimal area! What a joke.
Wake up NZ – you should be begging Oz to accept ccy union.