Europe's economic woes have given currency unions a bad name. But almost all of the time, they should be encouraged. Indeed it is far from clear the euro area has been a failure, given the vast improvements to international price stability, competition and transparency the euro has brought to Europeans across the continent each day.
We could enjoy some of those benefits too, on a smaller scale. As the New Zealand dollar nears parity with Australia's for the first time since the 1980s, the question to ask is why we bother having separate currencies at all. Both countries have a lot to gain, especially New Zealand, a fifth of whose trade is with Australia.
The benefits of currency unions are irrefutable and clear, while the costs are academic and debatable. The hundreds of millions of dollars in bank fees paid every year to facilitate about $US15 billion ($19.5bn) a day in Australian-New Zealand dollar foreign exchange transactions would vanish overnight.
But more importantly, so would exchange rate risk. Households and businesses could travel, trade and contract across the Tasman without having to worry about unfavourable movements in their currencies. Over time they would become even more integrated, and thereby stronger, more productive and their households and businesses better financially diversified.
For more than 30 years Australian and New Zealand governments have been dismantling barriers to trade, investment and the movement of workers between their two countries. New Zealand's adoption of the Australian dollar with some reasonable accommodation by Australian authorities should be the next step (a new, common currency is politically unrealistic). New Zealand's Treasury secretary could sit on the Reserve Bank board, whose monetary policy charter would be amended to include New Zealand.
Yet both countries' productivity commissions concluded in 2012 that the "prerequisite conditions for a trans-Tasman monetary union do not exist", referring to arguments against currency unions that were formalised by Robert Mundell in the 1960s.
Mundell argued that currency unions were only economically sensible for economies with similar economic structures and where workers were relatively mobile among them. In these cases, the loss of the ability to set interest rates (via a central bank) and an exchange rate to insulate against unique economic shocks would not be so great.
Labour mobility is already high between culturally similar Australia and New Zealand. Certainly it is much higher than in Europe, where different languages thwart mobility. About 650,000 New Zealanders live permanently in Australia and about 70,000 Australians in New Zealand. And mobility will only increase as the costs of air travel inevitably fall further.
It is true, though, that the two economies are structured differently, New Zealand's economy being geared towards dairy exports, Australia's towards bulk resources and energy.
But the problem with these sorts of tests is that they would suggest that Western Australia should have its own currency, since it is even further away from Sydney than New Zealand and, within Australia, uniquely affected by global iron ore prices. Perhaps increasingly gas-dependent Queensland should have its own, too. Likewise, the wildly different economies of California, Texas and New York - all far removed from each other - suggest the US should have multiple currencies to help its various regions adjust to different economic shocks.
This is ridiculous, of course. Australia and the US are far better off having the one currency across their whole economy. The wider a currency's acceptability, the more useful and efficient it is. Had New Zealand decided to become part of the Commonwealth of Australia in 1901 (as it nearly did), it would still be enjoying a dairy boom. But no one sensible would be suggesting today that it should have its own currency.
Yes, New Zealand would lose the ability to set its own interest rates, which would probably be permanently lower in a currency union with Australia. (Kiwi interest rates have tended to be higher, perhaps reflecting the greater compensation global investors require to hold a marginal currency.)
But the benefits of "policy independence" may have been oversold. They rest on the assumption that the bureaucrats making the decisions about monetary policy are in fact making the best decisions. The global financial crisis starkly illustrated that at least sometimes, collectively or individually, they might not be.
Moreover, the argument that a separate nominal exchange rate helps to insulate economies from unique shocks to their exports and imports arose in a very different world half a century ago, when trade flows dominated foreign currency transactions. They certainly don't any more.
The $US600bn or so of Australian dollars traded in global FX markets every day has much more to do with speculation among financial institutions than the vicissitudes of Australia's trade balance. National currencies exhibit massive swings that have no plausible relationship with developments in the real economy.
The argument for separate national currencies is weakening as wages and prices become more flexible thanks to technological changes. The rise of digital currencies may undermine them further.
