International investors are likely to see Australia as a safe haven and pour their funds into the country if the eurozone collapses, according to Treasury secretary Ken Henry.
However, the flip side of this investment would be a rise in the Australian dollar, with repercussions for export-driven sectors of the economy such as manufacturing.
In an interview on the ABC’s 7.30 report, Henry said that if the “worse things happens [in Europe]” it would be quite possible that “Australia will be seen as offering something of a safe haven for global capital movements”.
“That’ll be the first time in the post-war period, but it’s possible to imagine it now,” he said.
Asked if Europe’s collapse could be a good thing for Australia, Henry hedged his bets, saying that on the one hand it would make it easier for Australia to fund its current account deficit, but on the other hand it would mean “a high-valued Australian dollar, and as you know that’s an issue already causing some concern for some sectors of the Australian [economy].”
In the current two-speed economy Henry said the high Australian dollar placed real pressures on industries like manufacturing, which are configured “on the assumption of 72-cent exchange rate”.
He also said that wage growth had been quite muted except for the mining sector, though wages earned by miners were “nowhere near the prices growth in the mining sector”.
He described the current mining boom as “Mark 2”, with the effects not being passed onto households in terms of their wages as they were in the first phase of the mining boom before the GFC.
“In the what is being referred to these days of Mining Boom Mark 1, that is the mining boom Australia experienced up to the GFC… There was a lot of revenue coming in, huge amount of revenue actually,” Henry said.
During “mining boom Mark 1” Henry said the Howard government was handing out a lot of money to households through big tax cuts and big increases in family payments, with the result that “households actually felt quite good”.
“They felt that they were getting something from this mining boom and of course in this mining boom Mark 2 the revenue is simply not there and it’s much more difficult therefore for governments to make people to feel good,” he said.
This article first appeared on Property Observer.