Liam Dann on business

Business editor of the New Zealand Herald, Liam Dann, discusses New Zealand and international financial matters

Liam Dann: No legs for merging dollars

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While near equals on the sportsfield, the New Zealand and Australian economies have very different needs. File photo / Wayne Drought
While near equals on the sportsfield, the New Zealand and Australian economies have very different needs. File photo / Wayne Drought

Australia and New Zealand could adopt a common currency - well that's according to a headline on the UK's Telegraph website on Thursday.

That would be a bit of an eye opener. Government agencies have a habit of putting announcements out late on the day before a holiday weekend but a sneaky plan to adopt the Australian dollar would be pushing it.

We won't be of course. The headline had seriously over egged the content of a discussion document put out by the Productivity Commission. Brian Fallow covers the report in today's Herald.

That click-grabbing Telegraph headline helped make the story second most popular on that website's business section. It's nice to know the Brits are interested.

But for those who read on, the article gives the game away in the first sentence.

"The productivity commissions of the two nations indicated a shared transtasman currency could reduce business costs but pointed to Europe as an example of possible downsides"

Well yes, a bit of a downside then. On the one hand, we could reduce some transtasman business costs. On the other, there's Europe.

And let's not be coy about it, if you apply a European Union scenario to Australasia, it is New Zealand that gets the role of Greece or Spain.

We've got enough debt to pull off the part. All we'd have to do is drop our productivity and reduce our export revenue to the point where paying back the debt looked unlikely. Next minute, international investors would be fleeing and we'd be begging for bailouts.

The Productivity Commission report highlights the risk that a shared currency - with unified monetary policy - runs into trouble if the countries are at different points in the economic cycle.

In other words if growth in one country's economy is accelerating, you might raise rates to keep it in check. If the other country's economy is struggling to get momentum, you'd need lower rates.

But only one rate setting is possible. That's already a problem for Australia where a two speed economy has developed, pitting the demands of the mining states against those of the more stagnant Victoria and NSW.

With a shared Australasian currency model New Zealand's economy would hardly get a look in.

Quite appropriately, given Australia's larger population and economic weight, policy settings would have to suit Australia.

For New Zealanders rates could stay too low for too long - fuelling property bubbles to which we are already prone. Or more likely, as is the case now, they would be higher than we can afford, stifling growth and putting homeowners and businesses under intense financial pressure. The official cash rate in Australia is nearly two per cent higher than it is here.

There would be efficiencies and cost savings for transtasman business but though still our biggest trading partner, Australia only accounts for about 20 per cent of trade. The bulk of the rest is done with the US, Europe and increasingly China.

The idea of currency merger - something talked about quite seriously through the first half of the last decade - has been all but killed off by the structural problems that have emerged in Europe.

That's on this side of the Tasman. Over the ditch it's never been an important enough issue to generate much debate at all.

If it was ever to happen New Zealand would need to make the move. We'd be adopting the Aussie dollar.

With the Australian dollar generally more valuable, it would make it even if tougher for our exporters to compete globally.

We didn't merge the two currencies at the height of the GFC because we already have the security of an Australian owned banking system (which we pay for by sending profits offshore).

And the ability of our Reserve Bank to act independently and slash rates was crucial. Remember that at that time Australia's response was to unleash the budget surplus and avoid the worst of the crisis by boosting consumer spending.

A small trading nation like New Zealand needs economic independence. It lets us react appropriately to global challenges.

It forces us to make our own way in the world. That's important because it gives us the motivation to achieve great things.

With an Australian dollar we'd be on our way to a future of dependency. Dependency breeds mediocrity - just look at Europe.

twitter.com/liamdann

- NZ Herald

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