KEY POINTS:
The increasing integration of the New Zealand and Australian economies over the past 30 years has been the reversal of the divergence that occurred a century ago.
But with the global game changing, New Zealand stands to benefit from a relationship with our closest neighbour that improves our chances of engaging with the rest of the world, particularly Asia. That, argue some commentators, may require us to relinquish some of our cherished independence.
The New Zealand and Australian economies were highly integrated in their 19th Century infancy but grew apart during the first half of the 20th Century as New Zealand focused on exports to Britain. In 1920, 80 per cent of our exports went to Britain and just 5 per cent went to Australia.
Mindful of the need to look beyond the UK for overseas trading partners after World War II, New Zealand signed a free-trade agreement with Australia in 1965.
As New Zealand's trade ties with Britain were further eroded when that country joined the European Economic Community in the early 1970s, our economic relationship with Australia grew rapidly and in 1983 the Closer Economic Relations agreement, hailed by some commentators as "one of the highest quality bilateral trade agreements in the world", was signed.
A quarter century later and Australia is our most important trading partner, taking about 20 per cent of our exports.
Further harmonisation of the two economies is now being pursued through the Single Economic Market process which aims to remove all barriers impeding transtasman commerce. Recent work has included establishing closer working relationships between capital market regulators in both countries.
But, argues New Zealand Institute director David Skilling, items currently on the agenda are "unlikely to unleash a torrent of transtasman economic activity".
Most of the major obstacles to transtasman business have now been removed and those that remain, including our separate currencies, central banks and capital markets, are unlikely to change any time soon as they are politically fraught.
Last year an Australian poll suggested almost half of New Zealanders wanted a common transtasman currency, a big increase from the 29 per cent who supported the idea in a 2000 poll.
Around that time, National Party leader John Key suggested it was an idea that should be explored but he was attacked by Finance Minister Michael Cullen who pointed out New Zealand would stand to lose control of monetary policy.
While the economies of both countries are largely dominated by commodity exports, they are different commodities and our business cycles are not perfectly aligned. What might be the optimum monetary policy settings for Australia's economy at any given time are not necessarily going to be best for New Zealand. This is an issue for Australia's various states let alone different countries.
While Cullen opposed a single currency, he appeared to be more willing to explore a move to a single transtasman banking regulator a few years ago.
That prospect was strongly opposed by the Reserve Bank, which was likely to be either disestablished or diminished under the proposal.
The RBNZ has moved to try and ensure that any difficulties experienced by the big four Australian banks, who among them control more than 90 per cent of New Zealand's banking assets, do not impact on their local subsidiaries or their customers.
Meanwhile, Skilling points out that while CER and subsequent harmonisation of the New Zealand and Australian economies has produced significant benefits for New Zealand, it has also helped facilitate what is referred to as the hollowing out of our capital markets.
With few constraints to the movement of capital across the Tasman, Australian companies have had a field day using cash generated from their compulsory superannuation regime to buy up New Zealand companies.
At present, Australia has just under $50 billion in direct investment in New Zealand or $80 billion if you include stakes of less than 25 per cent.
The Australian buy up has fuelled fears that the local sharemarket will soon be unviable as a stand-alone entity and is likely to be subsumed into the Australian capital markets. That, NZX chief executive Mark Weldon told the Business Herald earlier this year, is not an attractive prospect.
New Zealand without its own sharemarket would likely be more provincial than it is now. Weldon pointed to Adelaide, "where there ain't a lot doing" as an example of what we might look like.
Part of the problem is tax settings, particularly those around imputation or franking credits, have encouraged Australian buyers to take New Zealand companies over completely and delist them. During his visit here earlier this year, Australian Treasurer Paul Swan indicated that the Australian Tax Office was reviewing its policy in this area.
While that sparked some hopes of a change, Weldon was sceptical, arguing that Australia's corporates and tax office benefit too much to seriously consider altering the status quo.
That pragmatic view of what will drive future work on transtasman integration is shared by Victoria University economics history lecturer John Singleton.
"Ultimately the harmonisation is going to be based more on Australian terms than New Zealand's."
Furthermore, Singleton believes it is market forces, rather than any central planning by policy makers, that will drive the process in future.
Singleton believes that further consideration of a single currency and at least further co-operation between the two central banks is inevitable, as does Skilling.
However Skilling believes that further work on our economic relationship with Australia should be done with an eye on the rest of the world, particularly Asia.
"The transtasman relationship's in good heart but if you're trying to think about where to go next it's probably not just going to be increasing exports across the Tasman. The big stuff is around free-trade agreements with countries in Asia and climate change and things of that nature."
Skilling is talking about the potential for the two countries to team up to project a larger presence to the rest of the world and to achieve scale, ideas that he discussed in a recent essay.
However, he believes this outward looking focus to transtasman relations may throw up some fresh arguments in favour of a common currency, primarily the reduction of exchange rate volatility and a subsequent reduction in the interest rate risk premium we pay.
"Developing relationships and alliances in order to build a more substantial regional and global presence will likely require forgoing some discretion or independence as a consequence.
"The task is to assess where it makes sense to reduce independence in decision making, and where the costs exceed the benefits."
Skilling is mindful of the "strong independent streak" apparent in the debate in New Zealand about these types of issues.
"But it is important to take a hard-headed look at the benefit generated by such an independent stance. On some policy issues this has worked well, such as the independence of the NZX, but on other issues it may not be appropriate."
