Currency union debate unlikely to support the NZD

Data Flash (New Zealand) Currency union debate unlikely to support the NZD

New Zealand's PM Clark and RBA Governor Macfarlane do not speak the same language

In response to the further fall of the NZD, New Zealand's Prime Minister, Helen Clark, suggested that the option of currency union with Australia should be considered carefully. This follows a study released earlier this year, which found that there was strong support in the NZ business community for such a union.

Yesterday RBA Governor Macfarlane replied by saying that `Our attitude has always been that it's essentially a New Zealand decision. I think the benefits or costs are going to be borne almost exclusively by the smaller member of the partnership ... We would be co-operative, but would see it as predominantly a decision for New Zealand.' Australian Treasurer Costello, through a spokesman, also indicated that the Australian government would carefully consider any formal proposal from another country to adopt the Australian dollar.

While the comments by the Australian officials were interpreted by the media as a step closer to currency union, we take a different view. PM Clark quoted Europe as an example of a successful currency union when she made her comments. What she would like to be investigated is a proper merger of the two currencies and monetary policy systems. However, that is not what the Australian officials are proposing. Mr Macfarlane and Mr Costello were talking about NZ simply adopting the Australian currency as legal tender without having any say over joint monetary policy. That makes the option very unattractive for New Zealand and is unlikely to ever receive significant public backing.

Currency union no substitute for economic adjustment

Finance Minister Cullen and RBNZ Governor Brash have repeatedly indicated over recent months that they do not consider currency union a serious option. Both the MoF and the Governor have rightly pointed to the currency as a price that adjusts in order to reflect differences in economic cycles and fundamentals. In the case of New Zealand, currency adjustment facilitates the urgently required improvement of the external balance. In the debate about currency union it should be recognised that the weak NZD is a symptom of weak economic fundamentals. Fixing the NZ currency against the AUD would merely deal with the symptom, but do little to achieve an improvement of the fundamentals.

NZD weakness likely to persist until the end of the year We do not expect currency union to be advanced as a serious issue - due both to the above political and economic considerations. It will therefore not become a driver of a NZD recovery. Even if it was considered seriously, it would not be a short-term proposition. Consequently, the current debate does not lead us to review our forecast of continued NZD weakness in the near term. We expect the NZD to trade as low as 40 cents against the USD, before rebounding in 2001 as the growth and current account outlook improves.

Ulf Schoefisch, Chief Economist, New Zealand (64) 9 351 1375

This, along with an extensive range of other publications, is available on our web site http://research.gm.db.com

In order to read our research you will require the Adobe Acrobat Reader which can be obtained from their website http://www.adobe.com for free.

For answers to your EMU questions, check Deutsche Bank's EMU web site http://www.db.com/emu or email our helpline business.emu@db.com.

© Scoop Media