Monetary Union of Australia and New Zealand

Monetary Union of Australia and New Zealand

Pros and Cons of the Monetary Union between Australia and New Zealand

Introduction

Formation of monetary union is like a rose which comes with fragrance as well as thorns. Though there are some good economic advantages for the countries within the union, but if the union is consist of one much larger economy like Australia and small economy like New Zealand, history shows that powerful countries have more say in deciding who is getting the fragrance and who is getting thorns. It's a significant issue and its fate should be decided after a healthy debate on the issue in both the countries.

Advantages

Both the countries can surely reduce their respective transaction cost which travelers and traders incurs by exchanging Australian dollars for New Zealand or vice versa. Reduction of transaction cost in currency union may not result in a big saving for the traders of both the countries, but it will be worthwhile for the tourists of both countries. If both the countries agree to adopt US dollar as a common currency (another viable option of monetary union for Australia and NZ) the savings for the traders can be huge due to the enormous volume of US dollar-based international trade.

Monetary union of Australia and NZ can reduce the average interest rates of New Zealand. Adoption of Australian dollar or US dollar, New Zealand and Australia's need for the payment of currency risk premiums can be avoided which savers from both the countries demand for holding their respective dollar assets (Coleman, 2002, Pp.14-20).

Formation of currency union would eliminate all the chances of New Zealand interest rates falling below those in Australia (or the United States, if NZ adopt US Dollar). It is to be noted that long-term interest rates of NZ were lower than the long-term interest rates of Australia in early 2000s and slightly lower than those of United States in till 2004.

If both the countries manage to keep the inflation under control and maintain the confidence of financial markets through the instrument of prudent fiscal policy, it looks entirely reasonable that in time interest rates of both the countries would fall below than the interest rates in US. New Zealand will be more beneficial as its interest rates could fall below the interest rates in Australia. While the monetary union of Australia and New Zealand would not result in an elimination of uncertainty in exchange rates that exporter of both the countries face, it will surely result in the elimination of uncertainty in nominal exchange rate for the trade between the currencies forming the union. Chances are there monetary union can also reduce the uncertainty in the real exchange too. Uncertainty reduction in exchange rate within the monetary union improves will result in the stimulation of trade between Australia and New Zealand. Business community on both sides also holds the view that monetary union would result in the improvement of trade ties between both the countries and will surely benefit the ...