KEY POINTS:
If National Party leader John Key is genuinely interested in a common currency with Australia he is making a rod for his back at next year's election - and will deserve the beating he gets. He thought the idea of an "Anzac dollar" worthy of discussion at the transtasman forum of political and business leaders this week.
"It's one of those things where I would have thought some solid work on it makes sense," said Mr Key, noting "the political difficulties of it are not to be underestimated" and he was not suggesting it was on "the short-term agenda" of either country.
The risks for New Zealand in a merged currency are not mere "political difficulties", they go to the heart of economic management and indeed national sovereignty. A great deal of nonsense is written and spoken about threats to national sovereignty from foreign investment in the private sector. So long as New Zealand remains in charge of its money, no such threat arises. But to adopt the coin of an economy five times larger would be to surrender our ability to keep this economy healthy in a more freely trading world.
Imagine what would happen in periods that the Australian economy was thriving, perhaps from a minerals price boom, and New Zealand's was in a slow patch, perhaps from low agricultural prices? The common currency would likely rise on Australia's strength and give our agriculture a double blow. Or if Australia's economy was in a trough and New Zealand's thriving, the currency would fall, requiring high interest rates in this country to offset the risk of domestic inflation.
Advocates of a common currency will point out that this happens now to some extent. The kiwi tends to move with the aussie on world currency markets and, indeed, the two economies tend to prosper at the same time. But they have been out of kilter at times and will be again. Their harmony, furthermore, makes it less necessary to merge the currencies for the sake of stability in transtasman trade.
Australia may be our largest overseas market but it is by no means the only important one.
The advantages of a single currency - lower borrowing rates for businesses and more stable returns on exports to Australia - would come at a cost to New Zealand's ability to respond to movements in the currencies of the United States, Japan and Europe.
Criticism of exchange-rate instability comes naturally from exporters and they are supported by some academic economists who have never approved of floating the dollar and exposing the domestic industry to imports. But, by concentrating on exchange rate fluctuations, these economists overlook the much greater stability that exposure has helped to bring to the economy overall. The trading world is enjoying much more steady and consistent growth now than it did in the era of protection and fixed currencies.
Mr Key must be aware of this, so why is he even contemplating a common currency? He succumbs perhaps to superficial discussion of the European example. Admirers of the euro forget the European Community is a huge welfare scheme. Fully 80 per cent of its revenues go in agricultural subsidies and regional development grants. Member countries with weak economies are more than compensated for the costs of a strong currency. Australia is unlikely to offer such comfort to New Zealand.
Australia's response to Mr Key's suggestion would be that we are welcome to adopt its dollar if we want but the Australians are not about to call it the "Anzac" or anything that might pretend to soften the blow to our sovereignty. The blow would be real. Mr Key needs to think again.
