Dialogue: What currency union would really mean

BILL ENGLISH* says New Zealanders need to understand the implications of a very small currency joining a small currency, how we would be better off and whether we want to give up control.

Opinion polls seem to indicate that joining the Aussie dollar is a popular option. Some New Zealanders, and apparently the Prime Minister, believe that the currency is so worthless and its prospects so poor that we may as well give it away.

The fondness for currency union is driven mainly by pessimism, yet so far no one seems able to explain what difference it will make.

We need to do better than give up, or reach for a new currency, just because we don't have any other ideas. Changing currencies is a big step and the Government should spend some time telling New Zealand what it might mean, instead of using the issue as a distraction from bad economic management.

For a start, the Australians don't see us as equal partners. Of course they are much larger. They are interested in New Zealand joining the Aussie dollar only on their terms, with their Reserve Bank, their fiscal policy and their business regulation. They don't see any benefit for them.

I spent a few days at the Global Economic Forum in Melbourne and the Green MPs on the protest lines confirmed the view of Australian opinion leaders that we are an economy going nowhere, heading off on a left-wing experiment with an odd electoral system.

It is not hard to guess that the United States would be even more indifferent. It's a bigger, stronger currency and it works on different cycles to our dollar. Whatever the consequences of joining the Aussie dollar, the bad aspects would be magnified joining the US.

So what are the issues we need to debate?

No one has yet put a compelling economic case for currency union. The best study done so far in New Zealand ends up saying that there are no good economic reasons not to do it.

That is an honest and reasonable economic position, because it acknowledges that there are no outstanding economic advantages in a common currency.

Too many people think that if we join the Australian dollar we will automatically be better off. That's like saying that if we join the Australian Olympic team we will get more medals. Something may well rub off, such as confidence or better coaching, but just being there doesn't change the basic performance.

The real issue is whether currency union will help New Zealand to do a better job of being a small economy open to the buffeting of world markets. Our economy needs to be flexible because we get pushed around more than large countries.

When we take on the Aussie dollar, we fix our exchange rate. The currency would be driven by factors in the much larger Australian economy. We could find our interest rates are driven up because of higher house prices in Sydney, or big pay rounds in Australia.

In other countries where this has happened, outside pressures on the economy just show up somewhere else. We might find that instead of our exchange rate dropping, unemployment would rise or house prices would drop.

The best example of this is what happened in Hong Kong during the Asian crisis. Hong Kong is tied to the US dollar, and it had a collapse in property and share prices as well as a surge in unemployment. Most of the problems arose directly from the link to the US dollar.

Other Asian economies with their own currencies had better recoveries with less pain.

In the long run you can't avoid real impacts on people's lives, but the buffer of a flexible exchange rate helps employment and asset prices to adjust. It's like driving down a rough road with a few more springs on the vehicle.

The economic arguments for the Aussie dollar are about making it easier to do business and making it easier to raise capital in a bigger market where it might be cheaper if interest rates are lower on average. We have yet to see whether these benefits outweigh the disadvantages that a fixed exchange rate would create.

We need to concentrate on being good at being small, rather than try to pretend we are big. A small currency may be part of the right recipe if we give it more thought.

In the end, though, it's a political argument. It's odd to hear the Prime Minister talking about silly little nationalistic preoccupations.

If we join the Aussie dollar we come under the control of the Australian Reserve Bank. Whatever we think of our own Reserve Bank, we do have legislation that controls its activities, and the Governor is accountable to politicians elected here in New Zealand. The Reserve Bank Act protects us from the whims of politicians, but it can still be changed by our politicians. We won't be able to change the Australian law. In any case, they might have a different view from us about inflation that doesn't suit us.

The Reserve Bank operates monetary policy, which is essentially about interest rates and inflation. The Government still directly controls fiscal policy - what we tax and spend. The two are related, and in Europe the move to a common currency meant giving up control of both. So we would end up having to run tax and spending policy to suit the Australian Reserve Bank and the Australian Federal Government.

These don't sound like silly nationalistic issues to me; they sound like important matters for democratic accountability.

New Zealanders need to understand the implications of a very small currency joining a small currency, how we would be better off and whether we are willing to give up our limited democratic control.

It's an issue that deserves more than a dose of tactical politics for the week served up by the Prime Minister.

*Bill English is National's finance spokesman.