Currency Union The Only Solution

Import News from the Importers Institute

Adopting the Australian dollar is the only real solution to New Zealand's economic woes, says John Edwards, chief economist of the HSBC Australia and New Zealand.

In a speech to the Importers Institute/HSBC Conference today, Edwards said international demand for the kiwi dollar was likely to fall further, as minor currencies moved out of favour.

"New Zealanders have got to think seriously about a common currency," said Edwards. "Within a few years it will not be a good market in which to easily hedge New Zealand's offshore borrowing. At that point the hedge market will require either a lower and lower currency or higher and higher interest rates.

"The only real solution available to my mind is to adopt a common currency with Australia."

This would have two immediate effects, said Edwards. "New Zealand immediately transfers all its existing New Zealand dollar obligations into Australian dollars. It also gives New Zealand borrowers access to the Australian dollar foreign exchange market, which is many times bigger than the New Zealand foreign exchange market."

It would probably also open up trade between the two countries, removing the exchange rate barriers smaller firms now face.

"Finally," said Edwards, "adopting a common currency solves the problem of running an independent monetary policy in a country of less than four million people, and an economy one sixth the size of Australia's.

"It's tough to run a monetary policy for such a small economy that is open the world, with a floating exchange rate, a very large trade share, very large capital flows, and - to cap it all - a very tight inflation target.

"By integrating with the monetary policy of a larger neighbour New Zealand has a chance to muffle the shocks."

Adopting the US dollar instead was not a real choice, said Edwards.

"A currency union really means a common monetary policy, and while New Zealand has some chance of making arrangements to influence Australian monetary policy, it has no chance whatever of influencing the policy of the US Federal Reserve.

"New Zealand cannot develop a closer political relationship with the United States, which is too big, too diverse, too preoccupied even to notice New Zealand's attention.

"With Australia, however, it already forms an economic union ... and it shares history, constitutional arrangements and geographic propinquity, which make closer political union at least a distant possibility."

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[ The text of full speech can be downloaded from http://www.silva.co.nz/conference/ ]

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