Why the Productivity Commission recommends against an Australia-New Zealand monetary union; Would require political union

Why the Productivity Commission recommends against an Australia-New Zealand monetary union; Would require political union

A monetary union between Australia and New Zealand could lead to more costs than benefits, the New Zealand and Australian Productivity Commissions say.

Releasing their draft report on possibilities for closer economic integration between the two countries, the Commissions say there were few instances where a monetary union had worked effectively without some degree of political union.

"Australia and New Zealand are separate countries: political union is clearly not a live option and this in turn rules out some higher forms of integration. In particular, proposals for a monetary union would take integration to the point where it started to generate net costs. Following the recent euro area experience, such proposals have little support today," the Commissions say.

The Commissions will release their final report in December, which will feed into the two governments' plans to commemorate 30 years of the Closer Economic Relations (CER) agreement between New Zealand and Australia.

Recommendations in the draft report include waiving certain CER 'rules of origin' tarrifs, making changes to lead to lower shipping and telecommunication costs between Australia and New Zealand, lowering ownership restrictions on sensitive land, allowing for mutual recognition of imputation credits, and developing a trans-Tasman tourist visa.

Read the Commissions' draft report here.

Here are the Commissions' comments on monetary union:

The possibility of a monetary union between Australia and New Zealand has often been raised in the past and was discussed in a number of submissions.

Determining which economies might benefit from forming a monetary union is a complicated task (Mundell 1961), and the limited available research only provides an overview of the costs and benefits of a monetary union (RBNZ, sub. 12).

Monetary unions offer a number of potential benefits. First of all, they remove the exchange rate risk on trade between member countries and permit price comparisons. This potentially increases investment and trade, and facilitates specialisation and productivity growth (Mundell 1961; Rose 2008).

However, the consequent increases in trade are generally small (Cote 1994). This is likely to be the case for Australia and New Zealand, since Australia accounts for only 23 percent of New Zealand’s merchandise exports (table 1.1), while New Zealand accounts for a much smaller share of Australia’s trade.

Monetary unions also entail a number of costs. They imply a loss of autonomy over monetary policy and exchange rate flexibility, which are important tools for macroeconomic stability. This means that in the event of an economic shock to New Zealand, but not to Australia (or vice versa), adjustment through the exchange rate or through monetary policy would no longer be possible, and would instead necessitate adjustment through prices, wages and employment.

Adjustment through these channels is typically slower and can result in more volatile prices and output (Rose 2008; RBNZ, sub. 12). The size of such effects will depend in part on the frequency of asymmetric shocks and the degree of synchronisation of the business cycles of the economies within a monetary union.

Business cycle synchronisation will itself depend on policy settings, the structure of the economies and resilience to economic shocks.

Determining the appropriateness of a monetary union involves assessing the significance of the benefits and costs. Available studies of a trans-Tasman monetary union suggest that the potential costs would outweigh the benefits. For example, Drew et al. (2001) and Hall (2005) found that if New Zealand had adopted Australia’s monetary policy in the 1990s, aggregate output in New Zealand would have been slightly higher, but this would have come at the cost of higher inflation and more volatility in both output and inflation.

McCaw and McDermott (2000) and others have also shown that a common trans-Tasman monetary policy would have produced greater volatility than occurred under current policy alignment.

There are few instances where monetary union has worked effectively without some degree of political union.

Overall, the Commissions do not consider that the prerequisite conditions for a trans-Tasman monetary union exist — a view that is shared by most participants in the study.

Here are the Commissions' notes on its draft recommendations to the two governments:

‘First freedom’: trade in goods

The main remaining impediment to merchandise trade between Australia and New Zealand is the cost of CER ‘rules of origin’. Waiving these for all items for which tariffs are at 5 percent or less — where rules of origin are unnecessary — would reduce compliance and administrative costs for a significant proportion of trans-Tasman trade.

Building on this reform, each country could reduce those tariffs that exceed 5 percent down to that level by, say 2015, improving the productivity performance of each economy and eliminating the need for costly rules of origin.

‘Second freedom’: trade in services

Reducing transport and telecommunication costs would facilitate trade across the Tasman. While the trans-Tasman air route is already quite competitive, two remaining regulatory barriers to competition could usefully be removed.

In relation to shipping, ocean carriers’ exemptions from key parts of competition regulation are no longer necessary and there would be gains from removing them. In regulating coastal shipping, Australia has followed a different path to New Zealand. A future review of the changes to Australia’s coastal shipping regulation should learn from the New Zealand experience in assessing what is in the best interests of the Australian economy.

In telecommunications, any move towards a more integrated market raises complicated issues. While the regulatory frameworks across the Tasman seem reasonably aligned, there are some significant differences in places that require closer examination. The two governments have announced that they will respond to the findings of a joint departmental investigation into options to reduce trans-Tasman roaming charges.

‘Third freedom’: capital flows

The three main areas of interest here are foreign direct investment (FDI), taxation and banking.

The two Governments should proceed to implement the investment protocol they signed last year which increased the thresholds for screening of trans-Tasman investment. There would be mutual benefits from extending this protocol to lessen the remaining ownership restrictions in ‘sensitive’ areas, given the closeness of the two countries.

An issue of greater concern to most business participants is that companies are not allowed imputation credits on trans-Tasman investment, so that company income is taxed twice if it crosses the Tasman. The fact that this has been debated for more than 20 years, however, is a sign of the complexities and judgments involved in addressing the matter.

Mutual recognition of imputation credits could expand investment across the Tasman and bring some efficiency gains. But this would involve sizeable fiscal losses as well as transfers of income between the two countries, which may or may not cancel out. This draft highlights the key determinants of these calculations, on which public comment will be sought.

In relation to banking, the two countries have adopted different approaches to prudential supervision. This is an area of regulation that is evolving rapidly, with an existing trans-Tasman forum well placed to assess integration opportunities.

‘Fourth freedom’: people movements

There are opportunities to reduce the costs and complications of (short term) trans-Tasman travel through wider implementation of SmartGate arrangements at the border, and development of a trans-Tasman tourist visa for foreigners visiting both countries.

In relation to the long-term movement of people, issues arise because while the two countries have long permitted virtually free movement across the Tasman, social security and tax systems can create incentives that distort migration choices. Current provisions to deal with these possibilities have placed some ‘trans-Tasman citizens’ in anomalous situations. The study contains some ideas for ameliorating this situation, but information gaps and the complexities and interconnections with wider national policy issues to do with migration and citizenship, mean that a more detailed assessment is needed.

Government services and benchmarking

There is considerable cooperation between the public sectors in Australia and New Zealand. This has developed organically as opportunities have emerged, and can improve regulatory outcomes and reduce the cost of providing government services. The two governments should ensure that government agencies consider opportunities for additional cooperation on a case-by-case basis. Additional use of performance benchmarking could identify scope for improved service delivery and enhance diffusion of best practice across the Tasman.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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I would have thought that a currency union between our two countries would be a non-starter for all the reasons the Euro isn't working. We could end up becoming Greece, borrowing to keep up with a more competitive Australia. Bad.

 
Also there are advantages to being separate countries with wildly different exchange rates - kiwis in Aus earning AUD view NZ as a better investment location due to the exchange rate benefits = it's easier for us to pay off our mortgage and save for a business or retirement from Oz, making us more likely to return one day (and bringing $$$ into NZ).

There is a growing trend to reverse the decision to move a lot of head offices to Aus and close down the NZ ones - it's now economically logical to relocate them back to NZ to take advantageous of the cheaper skilled labour force = more skilled jobs for kiwis.

 
Also I'm not sure how Australia would feel having their name changed to The West Island
 
:-)

I think it more likely we'd become South Mexico...or Northern Tasmania, StanleyG.....
 I had wondered how the social welfare policies would be impacted....was it discussed...?, I mean , it's a great incentive to repatriate some of their less desireable tennants. ...and bolster our Social welfare ministry at the same time...
 Nothing quite like growing the State .

Yeah NZ would be come the Eastern Tasmania of Australasia. Not a good thing.

Also I know not many posters on here are John Key fans, but until you have experienced Aussie politicians like Gillard and Abbott you just don't how lucky you are, mate (Fred Dagg was clearly ahead of his time, even if he does live in Oz now).

Also you have to understand the Aussie vote-buying welfare system of giving your hard-earned tax dollars away to bogans for things like having some more bogelets ($5000), propping up the macMansion property bubble ($15000), having a negatively geared investment property (the right of every bogan), and various other pointless freebies that now leads to 70% of the population getting some form of government assistance. And you think NZ is a nation of bludgers??? We don't need that.

Much I think Australia has some good points, most of those are due to it's geographical luckiness (the lucky country) not from the second-rate people that populate it. One of the big attractions of New Zealand is that it's NOT Australia.

Youse bloody Kiwis are just dreaming if you think us Aussies wanna currency union with you !
 
..... getcha shit together first , sport ...... form successful currency unions with countries of similar economic outlook to your own ....
 
Chuuk Lagoon springs to mind , and Pohnpei ........ ummmm ...  , Tulavu !
 
You're out of your league with us in Australia , mate ....... stone the flamin' crows , we wanna become Americans , not Sheep Fornicators !

Joint currencies are amazing - go EuroZone !

But I do remember arguing with many on this forum who thought it was a wonderful idea to have a currency union with Australia - theyre not so obvious on here now.
Gummy - I'm not sure Australia would be much bothered eitherway, the majority would dominate, and whatever worked best for the majority (i.e. Australia) is the way things would go - it would be a killer for NZ and loss of sovereignty that I for one wouldn't be happy with,  and a sideline/novalty for Australia.
 
 

The productive and exporting South Island should leave the Kiwizone and have it's own currency.  Leaving the ticketclipping and consuming North Island to it's own  mess.  Just kidding  ......  or hangon.