Alternate Timelines

What If New Zealand and Australia Adopted a Shared Currency?

• Alternate Timelines Team • 19 min read
Economic Political Contemporary Oceania
new zealand australia currency union monetary policy economic integration anzac dollar trans-tasman relations regional cooperation

Exploring the economic, political, and social consequences if New Zealand and Australia implemented a common currency, transforming trans-Tasman relations and their position in the global economy.

The Actual History

New Zealand and Australia maintain separate currencies—the New Zealand dollar (NZD) and the Australian dollar (AUD)—despite their close economic, political, and cultural ties. While various proposals for a common currency have been discussed over the decades, neither country has taken significant steps toward currency unification.

Trans-Tasman Economic Relationship

New Zealand and Australia have one of the closest economic relationships in the world:

  1. Trade Integration:

    • Australia is New Zealand's largest trading partner, accounting for around 15% of New Zealand's total trade
    • New Zealand is Australia's seventh-largest trading partner
    • The Australia-New Zealand Closer Economic Relations Trade Agreement (CER), in force since 1983, created one of the world's most comprehensive free trade agreements
    • The Single Economic Market (SEM) agenda has further reduced non-tariff barriers

  2. Investment Flows:

    • Australia is the largest source of foreign direct investment in New Zealand
    • Significant cross-Tasman ownership of businesses in banking, retail, media, and other sectors
    • Integrated stock market operations through the ASX-NZX partnership
    • Substantial portfolio investment flows between the two countries

  3. Labor Market Integration:

    • Trans-Tasman Travel Arrangement allows citizens to live and work in either country
    • Approximately 670,000 New Zealand citizens live in Australia
    • Around 70,000 Australian citizens live in New Zealand
    • Mutual recognition of professional qualifications in many fields

  4. Business Environment Harmonization:

    • Coordinated business law reforms
    • Joint food standards system
    • Mutual recognition of goods and occupations
    • Coordination of competition and consumer protection policies

Currency Arrangements

Despite this close integration, New Zealand and Australia maintain independent monetary systems:

  1. New Zealand Dollar:

    • Introduced in 1967, replacing the New Zealand pound
    • Floated in 1985 as part of broader economic reforms
    • Managed by the Reserve Bank of New Zealand (RBNZ)
    • Inflation targeting framework introduced in 1989, pioneering this approach globally

  2. Australian Dollar:

    • Introduced in 1966, replacing the Australian pound
    • Floated in 1983 as part of economic liberalization
    • Managed by the Reserve Bank of Australia (RBA)
    • Inflation targeting framework adopted in the early 1990s

  3. Exchange Rate Dynamics:

    • Both currencies are freely floating
    • Historically, the NZD has typically traded at 0.80-0.95 AUD
    • Both currencies are influenced by commodity prices, though with different sensitivities
    • Significant daily trading volume between the two currencies

  4. Previous Currency Union Discussions:

    • Periodic proposals since the 1990s for a common currency
    • Australian Productivity Commission study in 2004 found limited economic benefits
    • New Zealand Treasury and RBNZ have generally emphasized the importance of monetary independence
    • Business groups occasionally advocate for greater consideration of a shared currency

Current Status

As of 2023, the status of currency arrangements between the two countries is characterized by:

  1. Independent Monetary Policies:

    • Both central banks independently set interest rates based on domestic conditions
    • Different inflation cycles sometimes leading to significant policy divergence
    • Separate banking regulation systems despite Australian ownership of major New Zealand banks
    • Different approaches to issues like housing market risks and financial stability

  2. Political Positions:

    • No active government-level discussions about currency union
    • General political consensus in New Zealand about maintaining monetary sovereignty
    • Limited public or political support in Australia for currency sharing
    • Focus on other aspects of economic integration that don't require monetary union

  3. Academic and Expert Views:

    • Economic literature generally skeptical about net benefits for New Zealand
    • Recognition of potential transaction cost savings but concern about loss of policy flexibility
    • Acknowledgment that New Zealand would effectively cede monetary policy to Australia in any realistic arrangement
    • Questions about whether the two economies meet optimal currency area criteria

  4. Global Context:

    • Eurozone experience providing cautionary lessons about currency unions without fiscal integration
    • Growing recognition of the importance of independent monetary policy during crises
    • Increased interest in digital currencies potentially changing the calculus for physical currency unions
    • Regional currency arrangements generally losing momentum globally

While economic integration between the two countries continues to deepen in many areas, a common currency remains a theoretical discussion rather than an active policy consideration.

The Point of Divergence

In this alternate timeline, a series of events in 2023-2024 leads New Zealand and Australia to commit to establishing a common currency—the Anzac dollar—fundamentally transforming their economic relationship and regional position.

Catalysts for Change (2023)

Several factors combine to create the conditions for this historic decision:

  1. Economic Crisis: Both countries face unprecedented economic challenges:

    • Post-pandemic inflation proving more persistent than anticipated
    • Housing market corrections creating financial stability concerns
    • China's economic slowdown severely impacting both countries' exports
    • Growing vulnerability to currency speculation and volatility

  2. Geopolitical Pressures: The Indo-Pacific strategic environment deteriorates:

    • Intensifying US-China competition forcing difficult choices
    • Growing economic coercion from major powers
    • Increased regional instability threatening smaller economies
    • Recognition that greater regional economic cohesion provides strategic advantages

  3. Business Advocacy: Unprecedented private sector campaign emerges:

    • Major banks and corporations fund extensive research showing substantial benefits
    • Trans-Tasman Business Council launches high-profile "One Market, One Money" initiative
    • Digital payment providers demonstrate technology readiness for currency transition
    • Influential economic think tanks publish compelling cost-benefit analyses

  4. Political Alignment: Rare window of political opportunity opens:

    • Center-right governments in power simultaneously in both countries
    • Key economic ministers in both countries with personal connections and shared vision
    • Bipartisan support emerging from opposition parties in both nations
    • Public opinion shifting as economic uncertainty increases desire for stability

The Wellington Declaration (May 2024)

Following six months of intensive but largely confidential negotiations, the prime ministers of Australia and New Zealand make a historic joint announcement in Wellington. The declaration includes several key elements:

  1. Currency Union Framework:

    • Commitment to establish the Anzac dollar (AZD) by January 1, 2028
    • Three-year transition period following formal treaty ratification
    • Conversion rates to be fixed at the average exchange rate of the preceding five years
    • Detailed implementation roadmap with clear milestones and contingency provisions

  2. Institutional Structure:

    • Creation of the Trans-Tasman Monetary Authority (TTMA) to manage the common currency
    • Headquarters in Sydney with a major operational center in Wellington
    • Governance structure with proportional representation but special protections for New Zealand interests
    • Mandate focusing on price stability across the currency union with secondary objectives for employment and growth

  3. Economic Convergence Criteria:

    • Fiscal responsibility requirements for both countries
    • Harmonization of banking regulations and financial stability frameworks
    • Structural reform commitments to address economic asymmetries
    • Joint economic monitoring mechanism to track convergence progress

  4. Broader Integration Measures:

    • Enhanced labor market integration with portable social security benefits
    • Accelerated business law harmonization program
    • Coordinated infrastructure investment strategy
    • Joint approach to trade negotiations with third countries

This announcement represents the most significant change in trans-Tasman relations since the CER agreement and signals a new phase in the economic integration of the two countries.

Global Response (June-December 2024)

The international reaction to the Anzac dollar announcement is significant and varied:

  1. Financial Markets: Markets respond with initial volatility then positive sentiment:

    • Brief period of currency speculation followed by stabilization
    • Reduction in risk premiums for both countries' government bonds
    • Strong performance of banking stocks in both markets
    • Increased international investment interest in the region

  2. Major Powers: Strategic responses from key international players:

    • United States expresses strong support, seeing enhanced allied economic cohesion
    • China shows concern about reduced economic leverage over individual countries
    • European Union offers technical assistance based on eurozone experience
    • United Kingdom proposes enhanced financial cooperation with the currency bloc

  3. Regional Neighbors: Pacific nations consider implications:

    • Several Pacific Island nations express interest in potential currency association
    • Singapore and Malaysia accelerate their own discussions about monetary cooperation
    • Indonesia seeks assurances about economic stability in its southern neighborhood
    • Regional organizations begin studies on broader Pacific monetary arrangements

  4. International Organizations: Institutional engagement intensifies:

    • IMF establishes technical advisory team for the transition
    • OECD produces comprehensive analysis of expected economic impacts
    • Bank for International Settlements offers clearing and settlement expertise
    • World Bank examines development implications for Pacific region

This international response creates both opportunities and challenges as Australia and New Zealand begin the complex process of establishing their common currency.

Immediate Aftermath

Transition Preparations (2024-2026)

The first two years following the announcement involve intensive preparation across multiple fronts:

  1. Legal and Treaty Framework: Formal structures established:

    • Trans-Tasman Monetary Union Treaty signed in Canberra (November 2024)
    • Parallel domestic legislation passed in both parliaments
    • Constitutional implications addressed through careful legal design
    • International recognition secured through formal notifications

  2. Institutional Development: New monetary institutions created:

    • Trans-Tasman Monetary Authority established with initial staff of 300
    • Joint currency design committee with public consultation process
    • Technical committees addressing payment systems, banknote production, and coinage
    • Training programs for financial sector participants

  3. Economic Policy Coordination: Convergence process begins:

    • Formal coordination of fiscal policies through joint ministerial meetings
    • Harmonization of tax treatments for cross-border investment
    • Alignment of financial regulations and banking supervision
    • Development of shared economic statistics and reporting frameworks

  4. Public Engagement: Comprehensive communication campaign launched:

    • Educational programs about the currency change in both countries
    • Business readiness initiatives for systems adaptation
    • Cultural elements incorporated into currency design and naming
    • Regular public opinion tracking showing growing support

These preparations create momentum for the currency union while revealing the enormous complexity of the undertaking, leading to some timeline adjustments but maintaining the core commitment.

Economic Adjustments (2024-2027)

The pre-implementation period brings significant economic changes:

  1. Monetary Policy Convergence: Interest rate policies gradually align:

    • Initial gap of 1.5 percentage points narrows to 0.25 by late 2026
    • New Zealand experiences slightly higher inflation during convergence
    • Australia accepts marginally tighter policy than domestic conditions might warrant
    • Financial markets increasingly treat the countries as a single economic unit

  2. Business Adaptation: Private sector prepares for the new currency:

    • Major IT systems upgrades across both economies
    • Dual pricing appearing in retail environments ahead of schedule
    • Cross-border corporate restructuring to optimize under new framework
    • Surge in trans-Tasman mergers and acquisitions

  3. Investment Patterns: Capital flows respond to the coming change:

    • Significant increase in Australian investment in New Zealand
    • International investors developing pan-Anzac investment strategies
    • Property markets experiencing cross-border investment growth
    • Infrastructure investment accelerating in both countries

  4. Labor Market Effects: Workforce mobility increases:

    • Acceleration of professional migration between the countries
    • Wage differentials beginning to narrow in some sectors
    • Enhanced skills recognition frameworks implemented
    • Educational institutions developing more integrated programs

These economic adjustments create both winners and losers, with export-oriented businesses generally benefiting while some domestic sectors face increased competitive pressure.

Political Developments (2024-2027)

The political landscape evolves in response to the currency union process:

  1. Domestic Politics: The issue reshapes political alignments:

    • Minor nationalist parties in both countries gain support opposing the change
    • Mainstream parties maintain broad consensus despite some internal divisions
    • Regional interests within both countries express varied concerns
    • Economic sovereignty becomes a more prominent political theme

  2. Trans-Tasman Relations: Bilateral relationship transforms:

    • Dramatic increase in ministerial-level meetings and coordination
    • Development of new joint parliamentary mechanisms
    • Enhanced diplomatic presence in each other's capitals
    • Cultural exchange programs emphasizing shared heritage

  3. Governance Evolution: New coordination mechanisms emerge:

    • Annual Trans-Tasman Economic Summit institutionalized
    • Joint economic forecasting and planning capabilities developed
    • Formal consultation requirements for major economic policy changes
    • Expanded role for existing trans-Tasman business and civil society forums

  4. Public Opinion: Attitudes toward the currency union evolve:

    • Initial skepticism in New Zealand gradually shifts to cautious support
    • Australian public maintains consistent majority approval
    • Business community increasingly enthusiastic as implementation approaches
    • Generational divide with younger citizens more supportive

These political developments create a more integrated trans-Tasman political space, though with ongoing tensions around sovereignty and identity questions.

Long-term Impact

The Anzac Dollar Launch and Early Operation (2028-2030)

The new currency successfully launches on January 1, 2028, beginning a new era in trans-Tasman relations:

  1. Currency Introduction: The physical and digital transition proceeds smoothly:

    • Three-month dual circulation period with old currencies gradually withdrawn
    • Digital payment systems transition seamlessly on launch day
    • New banknotes featuring shared cultural and historical imagery well-received
    • Commemorative coins and collectibles creating public enthusiasm

  2. Monetary Policy Operation: The TTMA establishes its credibility:

    • Initial interest rate decisions broadly accepted in both countries
    • Transparent communication strategy effectively managing expectations
    • Regional considerations explicitly incorporated into policy statements
    • Technical operations running smoothly with minimal market disruption

  3. Economic Performance: Early economic outcomes generally positive:

    • Transaction costs savings estimated at 0.5% of combined GDP
    • Trade between the countries increases by approximately 15%
    • Financial market depth and liquidity significantly enhanced
    • Tourism and services trade particularly benefiting from simplified transactions

  4. Challenges Addressed: Initial difficulties managed effectively:

    • Some regional economic disparities requiring targeted interventions
    • Minor technical issues in banking systems quickly resolved
    • Public education needs greater than anticipated in rural areas
    • Isolated cases of price gouging during conversion addressed through consumer protection measures

This successful launch establishes the Anzac dollar as a stable currency and demonstrates that the extensive preparation has paid off, though the true test of the arrangement will come with future economic shocks.

Economic Transformation (2028-2035)

Over the medium term, the currency union drives deeper economic changes:

  1. Market Integration: Business operations become truly trans-Tasman:

    • Retail chains operating identically across both countries
    • Service providers expanding seamlessly across the common market
    • Price convergence for most consumer goods and services
    • Genuinely integrated labor market with minimal friction

  2. Financial Sector Evolution: Banking and finance transform:

    • Consolidated trans-Tasman banking system with shared regulation
    • Deeper capital markets with increased liquidity and investment options
    • Specialized financial services developing to serve the unified market
    • Wellington emerging as a significant financial center complementing Sydney

  3. Industrial Specialization: Production patterns shift:

    • New Zealand focusing more on high-value agricultural processing, tourism, and specialized manufacturing
    • Australia concentrating on resources, advanced manufacturing, and financial services
    • More efficient allocation of capital across the combined economy
    • Productivity improvements from greater specialization and scale

  4. External Economic Relations: Combined international economic presence:

    • Anzac dollar becoming the third most traded Pacific currency
    • Joint trade negotiations yielding more favorable outcomes
    • Coordinated approach to foreign investment screening
    • Combined economy ranking as world's 10th largest

These economic transformations create a more efficient and globally competitive trans-Tasman economy, though with some adjustment costs during the transition to new patterns of specialization.

Political and Social Integration (2028-2035)

The shared currency catalyzes broader integration:

  1. Governance Evolution: Political institutions adapt to economic reality:

    • Development of formal trans-Tasman ministerial councils with decision-making authority
    • Regular joint cabinet meetings addressing shared economic challenges
    • Parliamentary exchanges becoming routine
    • Discussion of more formal political union beginning to emerge in some circles

  2. Identity Shifts: Public perceptions of national identity evolve:

    • Strengthened sense of shared "Anzac" identity alongside national identities
    • Younger generations increasingly viewing the two countries as a single economic space
    • Cultural expressions increasingly incorporating trans-Tasman elements
    • Sports rivalries remaining intense while political differences diminish

  3. Social Policy Convergence: Welfare and social systems grow more similar:

    • Portable pension and healthcare benefits fully implemented
    • Education systems developing more compatible qualifications
    • Harmonization of consumer protections and product standards
    • Labor regulations gradually converging

  4. Demographic Patterns: Population movements respond to integration:

    • More balanced migration flows between the countries
    • Regional population growth patterns reflecting economic specialization
    • Family formation increasingly spanning the Tasman
    • Shared approach to immigration from third countries

These social and political developments create a more cohesive trans-Tasman community, though national identities remain distinct and important to citizens of both countries.

Global and Regional Influence (2028-2035)

The currency union enhances the international position of both countries:

  1. Diplomatic Weight: Combined influence exceeds the sum of parts:

    • More effective voice in international financial institutions
    • Enhanced negotiating position in trade agreements
    • Greater resilience against economic coercion attempts
    • Increased attention from major powers

  2. Regional Leadership: Pacific influence strengthens:

    • Several Pacific Island nations pegging currencies to the Anzac dollar
    • Joint development initiatives with greater scale and impact
    • More coordinated response to regional security challenges
    • Enhanced capacity to counter external influence in the Pacific

  3. Economic Model: The Anzac approach gains attention:

    • Currency union without full political union studied as alternative to EU model
    • Success story contrasting with eurozone difficulties
    • Template for other regional integration efforts globally
    • Academic interest in the institutional design and governance arrangements

  4. Strategic Positioning: Security and economic alignment reinforcing each other:

    • Deeper defense integration complementing economic ties
    • More efficient allocation of security responsibilities
    • Enhanced technological cooperation in defense industries
    • Stronger combined voice in alliance arrangements

This enhanced global position provides both countries with greater influence and security in an increasingly challenging international environment, demonstrating the strategic as well as economic benefits of their currency union.

Economic Resilience Test: The 2033 Crisis (2033-2035)

The true test of the currency union comes with a major economic shock:

  1. Crisis Emergence: Global economic turbulence hits the region:

    • Severe downturn in China affecting commodity exports
    • Global financial market disruption creating liquidity challenges
    • Significant terms of trade shock for both countries
    • Regional security tensions adding to economic uncertainty

  2. Monetary Policy Response: TTMA faces its first major challenge:

    • Rapid interest rate adjustments to support economic activity
    • Unconventional monetary policy tools deployed effectively
    • Clear communication maintaining market confidence
    • Careful balancing of regional impacts within the currency area

  3. Fiscal Coordination: Joint fiscal approach proves crucial:

    • Coordinated stimulus packages avoiding free-rider problems
    • Targeted interventions for most affected regions and sectors
    • Temporary fiscal transfers between the countries addressing asymmetric impacts
    • Maintenance of long-term fiscal sustainability while providing short-term support

  4. Recovery Outcomes: The currency union demonstrates its value:

    • More stable currency than either country could have maintained independently
    • Deeper financial markets providing better shock absorption
    • Faster recovery than comparable economies outside currency unions
    • Public support for the Anzac dollar strengthening through the crisis

This successful navigation of a major economic challenge cements the currency union as a permanent feature of the trans-Tasman relationship, demonstrating that the benefits outweigh the costs even during difficult times.

Expert Opinions

Professor Arthur Grimes, Former Chairman of the Reserve Bank of New Zealand, observes:

"New Zealand's hypothetical entry into a currency union with Australia would represent the most significant economic policy decision since the reforms of the 1980s. The transaction cost savings and trade benefits are real, but the loss of independent monetary policy is a major sacrifice.

The most fascinating aspect would be the institutional design challenge. How do you ensure the smaller partner maintains meaningful influence in monetary policy decisions? The European Central Bank's 'one country, one vote' system wouldn't work for a two-country union with such different sizes.

The success or failure would ultimately depend on how similar the economic cycles of the two countries remain. Historically, they've been reasonably correlated but with important divergences at critical times. The elimination of currency risk might actually increase synchronization through deeper trade and investment integration, creating a self-fulfilling case for the currency union's optimality."

Dr. Laura Ebert, International Economics Professor at the University of Sydney, notes:

"The economic literature on optimal currency areas suggests that Australia and New Zealand might be better candidates for currency union than the diverse economies of the eurozone. They have similar economic structures, flexible labor markets, substantial trade integration, and a common language and legal heritage.

What's particularly interesting is how a currency union might affect the power dynamics between the two countries. While Australia's economy is over six times larger, New Zealand would gain influence over Australian monetary policy that it currently lacks, since Australian economic conditions already significantly impact New Zealand regardless of its monetary independence.

The international dimension would be significant too. An Anzac dollar would be more resilient to speculation and would likely become a more important regional currency than either the AUD or NZD individually. This could have meaningful geopolitical implications in an increasingly contested Indo-Pacific region."

Professor Warwick McKibbin, Former Reserve Bank of Australia Board Member, comments:

"The fiscal implications would be the most challenging aspect. Without some form of fiscal coordination, a currency union could create significant tensions during economic crises affecting the countries differently.

Unlike the eurozone, which attempted currency union among many diverse economies, the Australia-New Zealand case would be more manageable. However, it would still require careful design of fiscal rules and potentially some mechanism for fiscal transfers during asymmetric shocks.

The most promising approach would be to maintain separate fiscal policies but with enhanced coordination mechanisms and explicit crisis response protocols. This would preserve national sovereignty on taxation and spending while providing the framework needed to support a successful currency union.

The potential economic benefits are substantial, but they would only be realized with sophisticated institutional design that learns from both the successes and failures of other currency unions globally."

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