Published in Business Spectator (Melbourne), 30 May 2013

Since moving across the ditch to New Zealand last year, I have been astonished by how often a potential Trans-Tasman currency union is seriously discussed on this side of the Tasman. In Australia, the issue hardly seems to excite anyone – probably also because Australians have more important things to do than worry about New Zealand.

Here in New Zealand, on the other hand, there is still a lively interest in the issue as I found out last week. When I gave a speech on the euro crisis to an investor conference in Wellington, I was asked about the lessons from the crisis for New Zealand. My laconic answer ‘Stop dreaming of monetary union with Australia’, promptly made headlines.

Last year, the Lowy Institute conducted parallel opinion polls finding majorities against an ANZAC dollar on both sides of the Tasman. Yet opposition to the idea was quite a bit stronger in Australia (54 per cent) than in New Zealand (46 per cent). Remarkably, 43 per cent of New Zealanders supported a joint currency – including a majority of Kiwi men (52 per cent).

The reasons why monetary union retains some appeal in New Zealand is probably psychological and political. As a small and isolated country, there may well be some imagined benefits from teaming up with the bigger neighbour – sporting rivalries notwithstanding. However, economically such a move does not make sense. Not on the merits of Australia-New Zealand economic relations, and certainly not given the experience of European monetary union.

Most economists and government institutions have never really warmed to the idea of an ANZAC dollar – for good reasons. Last year, both productivity commissions came to the conclusion that despite three decades of Closer Economic Relations between the two countries there were still enough economic differences to render monetary union problematic. “Overall, the commissions do not consider that the prerequisite conditions for a trans-Tasman monetary union exist,” they wrote in their joint paper. Quite.

Indeed there are too many elements missing to allow for successful monetary integration. For a start, one only has to look at the movements of the cash rates of the Reserve Bank of Australia and its New Zealand counterpart. Prior to the financial crisis, the RBNZ’s cash rate was somewhat higher than the RBA’s. Ever since, it has been the other way around. This alone shows how central bankers in both countries have drawn their own conclusions from diverging domestic economic circumstances, resulting in different policy prescriptions.

With a joint currency, there would no longer be an option to cater for these differences. Instead, if one were to combine the Aussie and the Kiwi dollar at the moment, the result might well be a monetary policy with interest rates simultaneously too low for Australia and too high for New Zealand.

In practical terms, one might also expect that Australian interests would routinely trump New Zealand concerns when determining the cash rate. It would certainly be understandable given Australia’s economy is about seven times larger than New Zealand’s. But the European experience has demonstrated what such imbalances can lead to.

At the beginning of the century, the economies of France and Germany, the two eurozone heavyweights, were in the doldrums. The European Central Bank provided monetary stimulus to both with lower interest rates. This would have been fine and unproblematic had other eurozone members such as Spain and Ireland not experienced economic booms at the same time. For them, the expansionary monetary policy contributed to their property bubbles and overheated their economies, eventually resulting in the crash the Irish and Spanish are now dealing with.

For Australia and New Zealand it could be the same. A monetary policy primarily set for Australia would not necessarily be in New Zealand’s interest. If Australia boomed while New Zealand stagnated, the cash rate would be too high for New Zealand. Conversely, if Australia slowed while New Zealand grew, the joint cash rate could blow bubbles in the New Zealand economy.

In actual fact, rather than arguing that New Zealand and Australia should go for monetary union, one might well contend that their two currencies are not too many but too few. In both countries, we now see two or three-speed economies.

The differences in growth rates between Western Australia, the eastern seaboard states and Tasmania are well known – and they are mirrored in New Zealand by the growth differentials between Auckland, Christchurch and Wellington. It is clearly enough of a challenge for a Reserve Bank to make monetary policy for one country consisting of vastly different regional economies. Combining two such countries would only exacerbate the problem. Rather than introducing an ANZAC dollar, from an economic point of view there should be Perth, Hobart, Sydney and Auckland dollars.

In nation states, such monetary diversity is, of course, politically impossible. Because that is the case, such monetary differences are, at least in parts, addressed by fiscal equalisation mechanisms. But again, the European example shows how little public appetite there is for such policies in trans-national currency unions. Just as the Germans do not feel a great inclination to transfer some of their wealth to Greece, so we may expect very little enthusiasm for any fiscal equalisation schemes across the Tasman. Nor would we expect there to be any desire for debt pooling, political integration or jointly guaranteed government bonds.

New Zealand and Australia are certainly closer to each other than most eurozone members. The two ANZAC countries at least share similar institutions and speak (relatively) similar languages. By all practical measures their labour markets are perfectly integrated, evidenced by the half a million or so Kiwis living in Australia. And yet, even given these favourable circumstances there remain enough obstacles to forming a functioning monetary union. How much more ambitious, if not to say foolhardy, must the eurozone experiment appear then?

In any case, my advice to the investor conference last week was this: To benefit both countries, economic and trade relations should be deepened – but always stopping short of monetary union.

And if you really can’t help yourself and desperately yearn for a currency union between Australia and New Zealand against all odds, then at least you should also include Papua New Guinea. Simply because every failing monetary union deserves its Greece.