Benefits of a Currency Union

Discuss about the International Relations for International Monetary Fund.

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). 

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).

Reduced Transaction Costs and Increased Investment

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 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 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).

Inflation and Interest Rates

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)

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.

Price Homogenization and Trade Transparency

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. 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

References

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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.