By Michael Coote
Friday 25th October 2002 |
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To sweeten the deal, a one-euro coin is offered as an enticement. That will be about the only return made out of the rort by people stupid enough to take the bait. Trading currencies requires a quite substantial knowledge base.
The euro was always going to be interesting, given that sovereign states on adopting it had to surrender autonomy in various critical ways. The results are an object lesson for those who contemplate a common currency with Australia.
The disaster of the euro has rebounded on Germany, its most staunch advocate when it must have seemed like a good idea. They must be wondering if the ghost of collective insanity represented in Hitler haunts them still.
Germany finds itself hoist by its own petard. The euro plan must originally have seemed so cunning that, if a tail had been put on it, it could have been called a weasel. Now the rabid predator is biting the hand that feeds.
Like other EU countries, Germany had to say goodbye to setting its own interest rates (now done by the anti-inflationary European Central Bank), managing the value of its national currency (abolished) and conducting its own independent fiscal policy (since replaced by the Stability and Growth Pact that caps national deficits at 3% of GDP and requires eventual balanced budgets). The reward is a moribund economy that seems bent on deflation.
The Germans run a social democratic economy of the sort our own Labour-led pack of redistributionists hanker after. The chummy arrangement of mutual back-scratching by labour, capital and government has created a cost-plus economy that has priced itself out of the market.
Unemployment is stubbornly high, with all the social tensions, including neo-nazism, that go with it. Courtesy of the euro, Germany cannot lower interest rates, manipulate the value of its currency or undertake Keynesian-style fiscal stimulus. Like France and Italy, it is finding itself pressured instead to raise taxes and cut spending when it should be doing the opposite.
So what would New Zealand get out of a common currency with Australia? Unlike Germany, New Zealand would not be the leading economy in the currency union. In terms of scale, our national economy ranks alongside the richer Australian states.
Politically, the Australians regard New Zealand's national politics in much the same way as they see state politics. New Zealand would always be a junior partner in a currency union, effectively one state among many.
New Zealand is seen across the Tasman as a dead-in-the-water place south of Tasmania and perhaps only marginally more significant than Australian interests in Antarctica or deepest outer space. Unilateral Australian pursuit of a free trade agreement with the US is a stinging judgment on a feckless Labour government that has turned New Zealand into a non-aligned caring-and-sharing international irrelevancy.
The Australians said they did not want a common currency but that we could circulate their money. Arguably, we would be in a different position than Germany under such an arrangement.
As with the Germans, we would lose control of exchange rates and interest rates, although with our free-floating dollar we have already surrendered influence on the international vale of the kiwi. Given that we would be only a smaller part of the Australasian economy, we could pretty much do what we liked with fiscal policy. So the main casualty, it seems, would be Alan Bollard's new job at the Reserve Bank.
To justify a single currency, therefore, we would need to take into account the similarly commodity-based value of the Aussie dollar. To exchange one commodity-driven currency for another would appear to add no value to our collective measure of wealth.
On the other hand, we would have to assess whether, if New Zealand had been run under the same monetary regime as Australia over, say, the past 20 years, we would be better off now. Obviously, Finance Minister Michael Cullen has bought into that view with his decision to have our monetary policy run like Australia's.
The questions are whether our interest rates will converge on Australia's as a result instead of tending to be higher and whether the Australian monetarist regime, applied across a number of economically diverse states, will work the same way for an economy that is akin to a single Australian state, is infrastructurally impoverished and heavily dependent on primary sector exports.
In the meantime, trading the euro should probably favour short-selling given its own underlying rules are proving unworkable for the biggest EU economy and debate has broken out over whether to reset its terms and conditions.
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