Prime 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