Australia's continued economic disconnection

Note to readers: While short, this post took a little while to complete. I am bringing it up at the original scheduled publication date.

Interesting piece from Lorenzo, A misbegotten Union – Guest post by Lorenzo, on some current problems in the EU with a specific focus on the Euro.

From a purely management perspective, it illustrates the difficulties created for all of us when Governments' stuff up.

I don't think that any of us would argue that the creation of the EU and even the Euro has not made some aspects of doing business in Europe easier. It is easier to operate in a more harmonised environment. Yet, and this is something Australian business groups pushing for national uniformity should consider, common rules can come at a price.

I intend to do an update post on the latest developments in the Australian economy. The headline point is that Australia remains to some degree disconnected from developments expressed in terms of global or large regional unit data.

Today's Sydney Morning Herald story Indian coal rush heads Australia's way illustrates part of the reason, Australia's resource base. Demand will continue. The only issue really is price. However, there is a little more to it than that.

One of the wisest Australian Government decisions in recent decades was that taken in December 1983 to float the currency, allowing market demand to determine its value.  As I have discussed here before, the highly traded nature of the Australian currency creates its own problems since, as happened recently, the value of the currency can move in ways not directly connected to local economic conditions. However, the floating currency actually provides a very useful buffer, one that Greece would now find valuable.

In the lead up to the global financial crisis, the US dollar value of the Aussie declined sharply, providing one measure of protection to local demand. If, and on worst case scenarios, demand would continue if at a lower price for Australia's agricultural and resource exports. In this event, the currency would be likely to decline in value. However, this would of itself have some domestic stimulating effects.

A floating exchange rate combines with a good budgetary position and low Government debt.

To my mind, Government debt is too low. It is actually quite hard to deny that Australia has been under investing in public infrastructure. Further, the obsession with public-private partnerships has actually skewed public investment in a way that doesn't make a great deal of sense. Yet all this said, I cannot deny that Australia's budget and public debt position gives the country a great degree of flexibility in current circumstances.