An ANZAC Dollar Is That All We Get In Exchange For Our Sovereignty? - Bill Rosenberg There has been increasing debate about the idea of abandoning our currency, the New Zealand dollar, in favour of fixed alternatives such as the Australian dollar, the US dollar, or a new common currency with Australia – often called the ANZAC dollar. There is increasing support from business circles for this, with ACT wanting to go all the way to the USA. A substantial report was published in 2000 by the Institute of Policy Studies, sponsored by companies such as ASB Bank, the New Zealand Dairy Board, the Manufacturers’ Federation, Telecom, and the Stock Exchange: "An ANZAC Dollar? Currency Union and Business Development", by Arthur Grimes and Frank Holmes with Roger Bowden. Though in fact being inconclusive, it showed strong business support for a common currency with Australia, and has been widely taken to boost that case. Other studies have been published over the last two years by the Reserve Bank and Treasury. The proposal has enormous implications, many in CAFCA’s areas of interest. The Foreign Affairs, Defence and Trade Select Committee is holding an Inquiry into New Zealand’s economic and trade relationship with Australia. Its terms of reference include the currency proposals. Bill Rosenberg wrote a submission on CAFCA’s behalf, which included the following material regarding the currency proposal. The remainder of the submission revealed the nature of our investment relationship with Australia, and will be published in the next Watchdog. Single Trans-Tasman Currency We do not have the resources to respond fully to this issue, nor to provide a full critique of studies to date such as that by Grimes and Holmes , and those by Treasury and the Reserve Bank. We do not accept the assumptions and methodology of many of those studies, but note in particular and with concern that they are based overwhelmingly on analysis of the experience of the past twenty or so years. It is absurd to base such a monumental policy decision on such a short – and probably atypical – part of New Zealand’s history. Because the abandonment of a currency is so difficult to reverse, such methods of analysis make the extraordinarily arrogant assumption that current knowledge – on which current analyses are based – will not be modified or improved upon over a period approximating eternity in human terms. The knowledge on which they are based is also almost solely that of economics. Yet the effects of a currency are far wider than simply economic. By way of counterexample we point out that New Zealand had a fixed exchange rate – first the pound sterling itself, and then a New Zealand pound fixed to the British pound – until the 1930’s. The first devaluation took place in the context of the 1930’s Depression. Without it, New Zealand would likely have defaulted on its loans, and the consequences of the Depression would have been even more severe. The break from a fixed exchange rate was a part of the changes that occurred during the 1930’s under the first Labour government to begin the long process of transforming New Zealand into an independent country and economy. While in our view that process is far from complete, and acknowledging that circumstances now have many differences from the 1930s, there is nonetheless also a great deal to learn from our history. The principal arguments given in favour of a fixed exchange rate or monetary union are micro-economic. They are ones that make daily business easier, such as more predictability, less volatility, elimination of the costs of hedging and conversion of currencies. Yet the principal reason for a flexible currency is macro-economic: to make adjustment easier after an economic shock such as a fall in export prices, or a loss in demand such as occurred as a result of the Asian financial crisis. Another 1930s Depression? It needs to be spelled out in plain language what the unmitigated effects of such shocks can be: it is not made clear by the cloaked jargon of economic analyses. Those effects are the loss of export sales and income, leading frequently to loss of jobs, and at worst to bankruptcies, possibly on a large scale. In other words, potentially a depression of the depth that New Zealand experienced in the 1930’s. Some analysts have argued that our economy is enough in step with the home economies of potential currencies of adoption that those currencies would cushion us as well as the New Zealand dollar does. That is by no means accepted. McCaw and McDermott for example conclude that "monetary policy settings of Australia and the United States would have been inappropriate for New Zealand about 30% of the time" (p.40), and show that there is little more synchronisation of the movement of the prices of New Zealand and Australia’s main exports than would be expected by chance (p.43). But whatever the conclusions of such studies, we must emphasise again that they can only comment on the present and the short term. What if – as governments have repeatedly tried to achieve – the structure of New Zealand’s economy changes, for example to produce more value-added or knowledge-based goods? What if future New Zealanders want their country to become less (or more) exported oriented, or more self-sufficient? Those options may be impossible in a monetary union. In the last 20 years, New Zealand governments, beginning with the Muldoon administration, have progressively disposed of the tools that would give us some ability to deal with such shocks. These include import controls, exchange and capital controls, and tariffs. Our currency – inadequate as it is and always has been – is our last remaining weapon. We should be rebuilding this armoury rather than disposing of it. Without such direct means to address shocks in our international economic relationships, governments and other forces in the economy must resort to other, indirect, means. The first of these means is to cut wages – in the economists’ euphemism, "price and wage flexibility". Falls in real wages normally occur after a currency devaluation in any case, because the devaluation raises prices. But because it is across the board, and occurs over a period of years – often when other factors are in play in any case – the pain is easier to absorb. Without a devaluation, wage cuts will need to be immediate, severe, and focussed on the industries directly affected by the shock. Oh Well, We Can All Look For Work In Australia Normally there is considerable resistance to wage cuts. Either resistance is direct, through industrial action, or indirect, through people leaving the industry, region or country. In the international situation then, a second method of "dealing with" a shock is emigration. The country loses its most mobile – and frequently its young and most able people – overseas. As Coleman puts it in a way that only an economist could (and in a footnote!): "Even if people remaining in New Zealand were worse off after closer integration, it would not necessarily be a disadvantage to all New Zealanders, as some will migrate to take advantage of the higher wages in the benefiting regions" (p.15, footnote 28). If neither wage cuts nor loss of population are sufficient, a government can transfer resources from other parts of the economy. It can provide assistance to employees or industry for example. In recent years, New Zealand governments have deliberately refused such action. Instead they have ended up paying in unemployment and other benefits – another means of transfer of resources, but one that does not avoid the social costs. If none of those happen, people lose their jobs: unemployment rises, sometimes dramatically. So the price of the loss of our ability to control our economic relationship with the rest of the world is falling incomes, loss of our young and most able population overseas, and unemployment – in other words, the gradual dissipation of the nation. It is directly analogous to the effect of the free trade, free investment, fixed currency zone that is New Zealand’s internal economy: some regions prosper, while others (such as the West Coast) suffer continual loss of population, low incomes and high unemployment. Tasmania provides a similar example in Australia. That New Zealand will be the loser rather than the winner with Australia is evidenced by the existing drift of people, companies and resources from New Zealand to Australia under Closer Economic Relations (CER). Such consequences are recognised in the European Monetary Union by a transfer of resources between countries, from winners to losers, in the form of grants of various kinds. It would be national suicide to enter a monetary union with Australia or any other country without negotiating such an arrangement. In the end – and probably at the outset – that would mean political union, and the complete loss of our sovereignty. If we are seriously considering that, it should be stated, and the consequences for Maori and the Treaty of Waitangi, our independent foreign policy, and our ability to develop economically and socially, should be made clear. There is one positive aspect to this debate. The abandonment of our currency, whether by fixing its value or by adopting another currency, is a correct admission that the policies that accompanied the floating of the currency in 1985 have failed. Criticisms of the free-floating currency include the cost of the increased volatility of the New Zealand dollar (though the degree of that volatility is challenged by the Reserve Bank ), the uncertainty inherent in its movement against other currencies, and the cost of converting between currencies. Coleman goes as far as stating (p.24) that: "there is a growing consensus among economists that exchange rates are excessively volatile, and that there is little short term relationship between exchange rates and economic fundamentals even if exchange rates eventually reflect fundamental factors in the longer term". He presents results that demonstrate that the currency can "deviate from fundamentals for long periods of time" due to speculation. In addition, in New Zealand’s case the currency has famously deviated from fundamentals – in the sense that the economy has grown increasingly into foreign debt built by persistent current account deficits – due to it deliberately being used as a means to control inflation. The method used is to raise interest rates, which attract foreign investors, thereby raising the value of the currency, reducing both the cost of imports and internal demand. That it made exporters unviable, and encouraged unaffordable imports that put New Zealand companies and people out of work, is apparently only an unavoidable side effect. Uncontrolled Capital Movements Are The Problem But what both this and the speculation described above show is that it is uncontrolled or inappropriately controlled capital movements – i.e. cross-border investment – that leads to the failure of the currency to do its job. The effect of investors on a currency is also the main reason for not reverting to the position before 1985 – flexible but not floating rates, set and defended by the Government – which were designed to be a compromise between stability and damaging rigidity. The power of international investors has grown so enormously since then that a government of the size of New Zealand would find it almost impossible to defend the currency against attack. Even large European economies have found it difficult to resist such an attack. An example of such an attack, using large scale capital movement for speculative purposes that indicates the power available to such operators, was given by a US currency trader for Bankers Trust, Andrew Krieger. He claimed that in late 1987 he "played" several hundred million – possibly as much as a billion – New Zealand dollars against New Zealand’s currency, leading to a crash by 10% of the value of the New Zealand dollar . Only 2-3% of foreign currency dealing internationally is related to trade: most of the rest is speculation. In New Zealand’s case daily foreign exchange turnover averaged around $13.5 billion in April 1998 , so just two days trading is worth about our annual exports of goods and services. The clear conclusion therefore to the problems with either fixed or floating currency is for the Government to pursue nationally and internationally, not increased liberalisation of investment and other financial transactions, but international action to control the movement of capital so that flexible exchange rates can once more be defended. Foreign Control Watchdog, P O Box 2258, Christchurch, New Zealand/Aotearoa. December 1999. Email |
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