Evaluating a Currency Union: New Zealand and Australian Economies

This essay explores the potential formation of a currency union between New Zealand and Australia, analyzing its benefits and drawbacks. It discusses the potential for increased bilateral trade, reduced transaction costs, and disciplined monetary policies. The essay also addresses concerns such as the loss of sovereignty for New Zealand and potential negative cross-border spillovers of fiscal policy. The analysis considers the economic implications for both countries, highlighting the potential for increased investment and economic growth, while also acknowledging the challenges associated with adopting a new currency and coordinating economic policies. The essay concludes that while a currency union offers significant advantages for New Zealand, particularly in terms of economic stability and integration, it also presents challenges that must be carefully considered. Desklib provides access to this essay and other resources for students studying international relations and economics.

International relations1
INTERNATIONAL RELATIONS
Name
Department:
School:
Course:
Date:

International relations 2
International relations
Introduction
New Zealand is an island state situated in the south-west of the Pacific Ocean and
neighbouring Australia to the south-east. The country’s land is economically apt. Australia is a
sovereign country made up of numerous islands including mainland of Australia continent and
the island of Tasmania (Smith 2012, pp. 6). The currency union or monetary union is where two
or more countries share the same currency. Countries can share money without necessarily
having further integration. Australia and New Zealand preserved self-governing notes and
exchange rate guidelines after formation of International Monetary Fund (IMF) in the two
countries (Cooper 2014, pp. 22). Since that time each nation has its currency, but, there have
been periodic deliberations of the likelihood of a currency amalgamation. There are two
possibilities from this discussion. First, a chance of dollarisation: whereby the New Zealand
regime will adopt the Australian dollar as its exchange. Secondly, the possibility of a monetary
union; whereby the countries jointly have the shared money, central bank, and monetary policy
(Arkhipov et al. 2014, pp. 549).
For the two countries using the same money, bilateral trade is more substantial than two
republics using different currencies (Marsh and Miller 2012, pp. 22). It will create deceitful
relations between currency union position and bilateral trade. For instance, compatibility in
lawful organisations, greater social connections, better structure for transportation and tangled
mutual transfers will raise the attraction to shared currency, and it will inspire trade between the
two republics. The two nations sharing the money can also take extra strategies to enhance
incorporation and stimulate business (Donnelly 2013, pp.19).

International relations 3
New Zealand forming a currency union has more benefits. One of the most benefits is the
abolition of a transaction of currency conversion charges, and the instabilities in comparable
prices imminent from nominal exchange rate variations (Cooper 2014, pp. 24). The second
benefit is it leads to an increased investment across the border of the two countries in a currency
union. Formation of a currency union between New Zealand and Australia also has potential to
discipline policies, mainly to fight inflation. It means that creation of the currency union between
New Zealand and Australia will create positive impacts on the economy of New Zealand (Hosny
2013, pp. 134).
The formation of a currency union will lessen transaction rates acquired by dealers and
tourists when exchanging New Zealand dollars for others notes (Kelsey 2015, pp. 11). For
example, when one is buying goods or when trading foreign currencies; there will be an addition
to the price of the good or money. Therefore, it will not probably produce a considerable saving
although there will be a more significant benefit for tourists in both direction. With reduced
transaction cost it will lead to more saving hence more investment in the country (De Grauwe
2018, pp. 42).
Since the New Zealand administration will give up its national fiscal plan and the future
path of inflation and interest rates, they will be determined substantially by way of price rises
and interest duties in Australia (Mendes 2017, pp.146). The currency union may decrease
average New Zealand’s interest rate rates a little. The long-term interest charges of the two
countries may be similar, but, Australia short-term interest rates may be noticeably lower than
those in New Zealand. If New Zealand adopts Australian dollar, it will avoid paying the currency
risk premium which currently would be demanded by the savers for holding New Zealand dollar
assets. Thus, the kind of currency union will remove all chances that may make New Zealand

International relations 4
interest tariffs drop below those of Australia. It may look not likely that New Zealand interest
rate will ever decrease below those in Australia (Smith 2012, pp. 8).
Usage of sole currency and the evasion of exchange rate dealings will facilitate business
between the two nations, but these outcomes will benefit the Australia economy at a minimum
magnitude since Australia is a passive partner (Cooper 2014, pp. 27). Due to the differences in
the sizes of the two economies, it will be expected to be proportionally much more significant on
the New Zealand budget. A currency union between New Zealand and Australia which involves
having a new central bank and notes for both countries, and thus it can be of advantage to New
Zealand. The reduced interest rates will lead to increased investment in the country.
Low transaction cost and interest rates will lead to massive investment. The reduction of
operation cost and the institution of the convertible currency lead to the money market deeper
and integration. Traders from the partners' countries will not have to spend money to convert
currencies or worrying about the future value of various currencies (Milton and Siddique 2014
pp. 35). Therefore, it will compel businesses to trade and invest quickly across borders. It will
lead to an increase in international investment and increased international trade which will result
in stronger economic growth (De Grauwe 2018, pp. 46).
If New Zealand forms a notes union with Australia, it will not abolish exchange rate
insecurity which exporter from New Zealand country faces, but it would apparently eradicate the
nominal exchange rate doubt for trade in Australia, which will also perhaps shrink the real
exchange rate insecurity (Cooper 2014, pp. 30). The shared currency will increase trade between
the New Zealand and Australia due to the reduced transaction cost and elimination of the risk
arising from exchange rate fluctuations (Smith 2012, pp. 12). Hence, the introduction of the

International relations 5
common currency will boost the volume of trade between the two states. The currency union will
remove nominal exchange rate insecurity on only a moderately small part of the whole deal, but,
it is pretty an essential portion of the trade in a qualitative logic. The decrease in exchange rate
hesitation within this formed exchange union will facilitate trade between the two countries
(Cooper 2014, pp. 31).
An exchange union will upsurge commerce between New Zealand and Australia, and this
will motivate business within the currency merger, and this will yield some better output gains
because manufacturers from New Zealand country will move into areas of most significant
comparative advantage. Since this currency union will foster trade between the two countries, it
will create a platform to notice price relationship across the borders of the two nations (Hart and
Spero 2013, pp. 32). Hence, it will be as a result of reduced transaction cost for exchanging the
currencies.
Formation of a currency union creates a platform to notice price relationship across the
borders that will lead to an introduction of a high level of transparency in trade among member
state, and within them (Hart and Spero 2013, pp. 35). It will lead to the price homogenization in
the currency union. With increased business, reduced transaction costs and high level of
transparency, there will be freedom of movement of traders and workers across the two
countries. The free flow of workers between the two countries, New Zealand and Australia is as
a result of increased trade across the states. There will be free mobility of labour which helps
other countries from an asymmetric tremor which is the product of inflation in one nation and
slump in the other (Bonoli 2017, pp. 52)

International relations 6
The currency union between New Zealand and Australia will also lead to the inhibition of
deflations and speculation. The formed fiscal unions will protect both New Zealand and
Australia from the destructive effect of the competitive depression of the exchange which may
make one country take the business of the other nation (Smith 2012, pp. 14). If any of the two
countries try to do that under currency union, it will have an adverse effect of high inflation.
Due to the reduced transaction cost for exchanging currencies and free movement of
labour across the borders of the two countries, it will make New Zealand access markets and thus
increase the overall income of the nation (Bonoli 2017, pp. 56). The union also reduces shocks
from exterior instability to an individual state. Formation of the currency union helps the
countries which have no internal controls. It will also promote peace between New Zealand and
Australia because the two countries are interdependent. The union will also improve the tourism
sector in the two countries because there is a free and easy movement of people across the two
countries, and also due to no currency changes.
Although the formation of a currency union between New Zealand and Australia will be
of more importance to New Zealand, it has some detrimental effects on the country (Smith 2012,
pp. 16). First, it will lead to loss of sovereignty which means that New Zealand will adopt the
joint currency and give up the financial policies to the organisation which is monitoring the
union. The two countries have to give up their economic privileges to the central bank which
resolves on the monetary policies of the two nations (Arkhipov et al. 2014, pp. 550). The most
significant problem comes during a disaster when the situations are diverse in the two states and
cannot be controlled by the same method. For example, an abrupt surge in the unemployment,
the New Zealand government revenue will drop as levies are not paid; it will force the
administration to escalate taxes which will result in further ruin (Reinhart and Rogoff 2012, pp.

International relations 7
11). Therefore, it would be difficult to be in a currency union since a decline in the interest rates
during a calamity will aid one nation, but, will unfavourably upset the other.
The second challenge of forming a currency union is that it leads new negative cross-
border spillovers of fiscal policy (Slatter 2015, pp. 49). A national budgetary expansion raises
demand for savings, due to this, long-run interest rates will be pushed up and reduce investment.
Thus, the effect will spread to other countries imposing a negative externality. The other negative
impact of forming a currency union is that there will be a massive cost of adopting a new
currency to the economy (De Grauwe 2018, pp. 51). These are costs of educating citizens,
adjusting to the new money and such as the costs of changing computer soft wares.
Conclusion
New Zealand will benefit from the formation of a currency union with Australia. A
currency union between the two countries will generate some benefits for New Zealand. As a
result of a currency union between the two countries, it will favour the two countries in many
ways. One of them is reduced transaction cost of exchanging the currencies of the nations. The
formation of the union will lead to decreased interest rates which will increase investment in the
countries. The trade will grow across the countries which will create a good relationship between
the countries. Hence, there will be free movement across the states. Reduction of cost of a
transaction of exchanging currencies will create price transparency across the two countries.
Formation of the currency union has many positive impacts on the economies of the two
countries, but it has some few adverse effects on them. The currency union makes a nation to
lose sovereignty by adopting the common currency. The state incurs a cost of borrowing the new
money, which creates further negative cross-border spillovers of fiscal policy

International relations 8
References
Arkhipov, A.Y., Ishkhanov, A. and Linkevich, E., 2014. Global monetary system: from past to
future. Life Science Journal, 11(11), pp.548-553.
Bonoli, G., 2017. Labour market and social protection reforms in international perspective:
parallel or converging tracks?. Taylor & Francis, pp. 51-81.
Cooper, R.N., 2014. Exchange rate choices, pp. 21-35.
De Grauwe, P., 2018. Economics of monetary union. Oxford university press, 40-59.
Donnelly, N., Fraser, F., Haasdyk, J. and Tarbit, S., 2013, April. GeodesyML–A GML
application schema for geodetic data transfer in Australia and New Zealand. In Proceedings of
the Surveying and Spatial Sciences Conference 2013 (pp. 17-19).
Hart, J.A. and Spero, J.E., 2013. The politics of international economic relations. Routledge, pp.
31-51.
Hosny, A.S., 2013. Theories of economic integration: a survey of the economic and political
literature. International Journal of Economy, Management and Social Sciences, 2(5), pp.133-
155.
Kelsey, J., 2015. Reclaiming the future: New Zealand and the global economy. Bridget Williams
Books, pp. 10-21.
Marsh, I. and Miller, R., 2012. Democratic decline and democratic renewal: Political change in
Britain, Australia and New Zealand. Cambridge University Press, pp. 21-32.

International relations 9
Mendes, P., 2017. Australia’s welfare wars: The players, the politics and the
ideologies. Aotearoa New Zealand Social Work, 29(2), pp. 145-148.
Milton, S. and Siddique, M.A.B., 2014. Trade Creation and diversion under the Thailand-
Australia free trade agreement (TAFTA). Australia: University of Western Australia, Economics,
pp. 34-44.
Reinhart, C.M. and Rogoff, K.S., 2012. Financial and sovereign debt crises: some lessons
learned and those forgotten. In Documento presentado por los autores para la conferencia del
FMI (14/9/2012):" Financial Crisis: Causes, Consequences, and Policy Responses, pp. 9-18.
Slatter, C., 2015. The New Framework for Pacific Regionalism: Old kava in a new
tanoa?. DIPLOMACY, pp. 49.
Smith, P.M., 2012. A concise history of New Zealand. Cambridge University Press, pp.5-21.

International relations 10