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Currency Union Weighed, 'Seriously Entertained'

A comprehensive canvassing of the future for the kiwi dollar on Tuesday night (Oct. 31st) clarified the benefits and risks involved with developing a common currency with Australia. The panel discussion in front of 170 business people followed the Annual General Meeting of the Employers & Manufacturers Association in Auckland.

Reserve Bank Governor Dr Don Brash, Dr Arthur Grimes (who authored the book An ANZAC Dollar? with Sir Frank Holmes and Roger Bowden), and Senior Economist with the HSBC Bank in Sydney, Grant Fitzner, presented perspectives on the topic.

Dr Brash acknowledged two fundamental points raised by Dr Grimes and Mr Fitzner and not explicit in his prepared address. He acknowledged the NZD exchange rate has not accurately reflected New Zealand's terms of trade though it has acted as a buffer against external trade shocks. (Auckland's house prices have had a greater impact on our dollar's value than have our terms of trade.)

Dr Brash also agreed the liquidity of the NZD is declining.

The latter point added weight to the view expressed by Dr Grimes and Mr Fitzner that a currency union should be seriously entertained and certainly kept on our agenda for economic restructuring, though not as a top priority.

The three speakers noted a currency union is no panacea for other productivity boosting measures. Dr Grimes and Mr Fitzner agreed a currency union should be beneficial but other political and economic issues are of greater importance.

As expected Dr Brash took a neutral stance on whether New Zealand should try to advance the currency union proposal by discussing points for and against. He said a major disadvantage of monetary union is we would lose our own ability to manage external shocks impacting on the New Zealand economy.

Dr Grimes, who is Director of the NZ Institute of Policy Studies and a former chief economist at the Reserve Bank, supported a full currency union with Australia, but not pegging the NZD to the AUD, nor adopting the Australian currency as ours. He said three gains would be: * a reduction in transaction costs, especially for smaller kiwi businesses, * the volatility of output from New Zealand would be reduced, and * the move would assist New Zealand's development away from its dependence on primary commodities, the success overseas of which tends to push up our exchange rate and discourages investment in higher value added ventures.

He cited a New Zealand survey with 400 business responses in which 58 per cent favoured a common currency with Australia and 14 per cent against. But the survey also found virtually all kiwi companies employing between 11 and 50 staff were in favour of the idea.

Dr Grimes noted common currency was a hot topic in Asia; a benefit for Australia in combining with the NZ currency could be geopolitical as Australia sought to demonstrate leadership in the Asia Pacific region.

Mr Fitzner suggested a currency union with Australia might ultimately come packaged with other policy trade-offs to bring the two economies closer. But he noted if control was relinquished over New Zealand's monetary policy more pressure would come to bear politically on our taxation and fiscal policies.

The three speakers acknowledged the issue of a common currency came down to a political decision more than one to be decided by trade benefits, even though they agreed trade could be expected to grow more rapidly under a common currency than without it.

(ends)

Re released by Gilbert Peterson for the Employers & Manufacturers Association (Northern) tel 09 367 0900 x 614 gilbertp@ema.co.nz

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