Yesterday Julia Gillard became the first foreign leader to give a speech in Parliament. It was full of mateship and the usual joshing that is a theme for Australian-New Zealand relations. Beneath the jovial tone lay the theme of integration. This has been around for a long time, probably since the CER was first implemented back in 1983. It’s been somewhat on the backburner over the last 12 months as Australia has gone through a political shift but now the same theme is back on the table.

Is complete economic union likely? I addressed this back in September 2009 when it was last on the table. What has changed since then?

There has been a major shift in global political alignments. As the shift of economic power has moved from West to East, so has the political spotlight. Back in 2008 I noted cross border acquisitions from the East and that these signaled a major shift to a post-imperial world. That shift has continued apace with China rising to the fore, now the second largest economy in the world. For the ANZAC brothers that has major implications.

Being connected to the ASEAN has helped both Australia and New Zealand define its geo-political position in a post-Empire world, specifically post European Community integration. Asia is quite clearly the major focus in terms of trade and this has seen some interesting reaction from the old allies. This year we had a visit from William Hague, the British Foreign Secretary, along with his Defence colleague, Liam Fox. It was the first visit in almost 20 years and indicated that the UK was taking this shift East a little bit more seriously. Suddenly old friends were very much worth getting to know again. Previous to this we had a semi-royal visit from Hilary Clinton, the US Secretary of State, down under to sign the Wellington Declaration which put NZ back in the very, very good friends corner. And today we see the Treasury heads of the UK and Australia in town to meet with their NZ counterpart. This is of note as it is the first time they have met together.

So what does this all mean? Simply it’s a jostling for position and a reaffirming of old ties in  a very new world. This puts Australia and New Zealand in a very strong strategic position. We are friends of the old and the new world. We are well located geographically…out of the way but close enough. For the ANZAC buddies that poses some interesting questions. Stronger together, weaker alone or carry on as is?

We can see that the CER is being re-negotiated to allow of higher levels of non-reviewed investment which could mean a lift for corporate activity as well as a loss of company control. And this is really the crux of the matter. Do we want to control our own destiny? Lessons from Europe are all too stark in this regard. Sinking economies have no room to lower their currencies and so swing in the wind, completely reliant on bailouts.

Ultimately the people will decide on this, though its clear that further integration around common borders, regulations and practices is likely to continue. At what point does having separate currencies become a pain? Well ask anyone trying to transfer money between the two countries. You would imagine you could shift cash at minor spreads but actually you pay through the nose. Travelex is one the worst players in this market. Even market spreads are quite wide. So there is definitely a cost to doing business which might add up to 1-2% of overall activity.

A nation’s currency is ultimately a reflection of its sovereignty. The ability to issue your own coin is one the the most recognised symbols of nationhood and has often been as an economic weapon in the colonisation process. If you lose that ability then you lose control. It’s as simple as that. The way to overcome that is to just recognise that you are part of something bigger (in this case Australasia) and take the good with the bad. Personally I think it’s a tough decision to make. History tells me that having control over your own affairs is a good thing. But perhaps the mateship bond will swing views the other way. Perhaps it’s already happened. I’ll leave the final word to Peter Costello, the former Australian Treasurer, at the second Australia New Zealand Leadership Forum in April 2005 (“Crisis”, Bollard, 2010, 26):

“You guys in New Zealand have to get real. If you want to be part of a single economic market with us you can forget having your own banking system. Remember, you sold your banks to us: you don’t own your financial system any more. Leave the regulation to us”.

Strewth!!

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Surely the ultimate humiliation for New Zealand would not be losing the Bledisloe Cup nor even seeing the Wallabies win the Rugby World Cup in 2011 at Eden Park but the bone jarring crunch of monetary union with Australia.

Recently smoke signals have been wafting from the Beehive as John Key and Kevin Rudd white flagged the issue in recent talks. When politicians say it’s a good idea but unlikely you know that it’s on the table. In fact this is not a new story. It comes up whenever there has been a proper meltdown and New Zealand looks a bit lonely and downbeat.

It’s been raised by some local economic commentators and all the usual pros and cons have been mentioned. Don Brash laid these all out nicely in a speech back in May 2000 and it’s hard to see past his conclusion that it is primarily a political decision, given that the economic pay off is unclear.

It may be a political decision then but it may not be a comfortable one. As Bernard Hickey writes today “we may not have a choice if we continue to borrow heavily”. The “shotgun wedding” wouldn’t be the most favourable outcome but NZ is not well placed at the moment. To coin a phrase you can’t be a little bit pregnant.

And, as Brian Gaynor writes, according to a recent OECD study, New Zealand is perilously close to Iceland in a ranking of countries with exposure to “overseas debt……personal debt and financial leverage”.The numbers are eye watering and the piper will be most surely paid at some point in time.

But, for now, the Australian banks, which make up most of our banking system, have underwritten us by sending new capital across the ditch. We also had to follow Australia’s deposit guarantee scheme with no choice in the matter. To all extents and purposes we are heavily dependent on them. So as Bernard notes we may find ourselves at the altar of currency union by default and not by political will. And it may happen sooner than we think.

Is there an alternative? Yes. A fully sovereign domestic money supply. More on that another time.