The original sin of the euro crisis has much more to do with balance of payments problems than fiscal problems. This is a worry for NZ, since we have a huge structural balance of payments deficit -- although we've had a surplus in 2011 due to insurance inflows from the Christchurch earthquakes. While we have a major backstop in that we have our own currency, it's worth looking at the eurozone's monetary response in detail.

Pre-crisis, the current account deficits of the PIIGS were financed by voluntary lending, primarily from German banks. The crisis meant not only that this lending dried up, but capital flight as well. Instead, deficits have been indirectly financed through national central banks, effectively making everyone the Bundesbank's bitch. But the Bundesbank takes the risk that some countries may default. Furthermore, it has little direct control over German monetary conditions. As contagion spreads, it becomes increasingly important the ECB doesn't fuck up the short-term challenge of avoiding default or the medium-term challenge of adjusting balance of payments.

NZ is in excellent fiscal shape, but if the balance of payments is the driver then things aren't rosy. NZ's structural balance of payments deficit exists because foreigners have more capital in NZ than NZers have capital overseas. A big part of this consists of net liabilities to the Australian parents of NZ banks. The good news is that about 55% of our financial liabilities are denominated in NZ dollars. If things go way south, the RBNZ prints a bunch of money, the exchange rate drops, and a large proportion of the rebalancing is taken care of. Still, in a worst-case scenario where the Aussie parent banks are threatened, this probably won't be enough. Paying for bailouts would be painful, though probably not nearly bad enough to lead to default unless the policy response was totally bungled.

The RBNZ has plenty of ammunition to offset a second crisis. Still, it's worrying that the current account adjustment of 2008-09 has changed direction. One thing we should continue to have is higher inflation than Australia: another motivation for a looser policy target agreement.