One more victim can be added to the casualty list from the fallout of the eurozone debt crisis: the cause of currency integration in Asia.
The idea that countries as different as Japan and Laos, or Singapore and Myanmar, might share the same money has always been a vision for future generations, not the here and now.
However, policymakers have at least been heading in the direction of closer cooperation by formalizing the network of emergency central bank loans they set up in Chiang Mai, Thailand, in 2000 to try to prevent a repeat of the 1997-1998 Asian financial crisis.
Any notion, though, that the Chiang Mai Initiative (CMI) could form a springboard to more ambitious monetary coordination looks doomed since the bailouts of Greece, and now Ireland, have exposed the frailties of a common currency area with infinitely deeper economic and institutional roots than Asia can offer.
“The key message from Europe for Asia is that it undermines any argument that currency union is a sensible way forward toward closer integration,” said Peter Drysdale, emeritus professor of economics at Australian National University (ANU) in Canberra.
“That was never a persuasive argument, but it has close to zero credibility now,” Drysdale added.
The nations of Europe painstakingly knitted together their economies, and then their exchange rates, over the course of nearly half a century before they were ready to create the euro.
Even then, as the current crisis has exposed, the fathers of the single currency left gaping institutional holes that they are now scrambling to fill by creating mechanisms to enforce fiscal discipline and, as a last resort, enable sovereign debt restructuring.
Governments in Asia, by contrast, pride themselves in not poking their nose into their neighbors’ business.
It took the 10 members of the ASEAN along with China, Japan and South Korea — ASEAN Plus Three — a decade to turn the CMI’s complex web of bilateral currency swap agreements into a single, uniform facility.
The US$120 billion, ungainly named Chiang Mai Initiative Multilateralization agreement finally took effect in March.
However, don’t expect leaders to conclude that the moral from Europe’s debt mess is to get a move on. The opposite is more likely.
“There is a bit of concern about what has been going on in Europe and what it means for Asia,” said Jay Menon, an economist in the Office of Regional Economic Integration at the Asian Development Bank (ADB) in Manila.
Menon said the first lesson to be learned was the need for greater institutionalization to ensure the success of regionalism; second, admitting countries to a single currency before they were ready and without a means of enforcing fiscal discipline could lead to disastrous consequences.
“This implies that the deepening of Asian regionalism is likely to take even longer than before the euro zone crisis erupted,” he said. “It was a long way away before, but it’s even further away now.”
Some would say that is not a bad thing. Asia should concentrate on getting the basics right before reaching for the stars.
Razeen Sally, director of the European Center for International Political Economy, a Brussels think tank, said the logic for the EU to integrate trade in goods and services as well as investment capital flows was reasonably clear.
However, the economies of Europe do not have enough in common to constitute an optimal currency area, he argued. So monetary integration was a bridge too far.
Speaking in Beijing, Sally said: “If there is a big lesson to draw in this part of the world, it is that trade and investment integration should be secured incrementally without a leap into Utopian projects.”
“Because if you do make a leap into Utopian projects, the risk is not only will these projects themselves self-destruct, but they will lead to an unraveling of the kind of trade integration that Asia has already achieved,” Sally said.
Specifically, Sally said, if the euro were to crack, the risk of controls on capital flows within Europe could not be excluded, and that could spill over to protectionism in the 27-nation single market.
Drysdale also said the demise of Asia’s dream of a single currency should not prevent governments from forging closer links in other areas.
“All the other arguments for commodity and capital market opening remain intact, and are reinforced by a sense that it is necessary to promote regional growth and integration in the face of continuing weakness in Europe and North America,” he said.
The argument in favor of keeping a close eye on economic and financial performance in the region has not gone away either, especially as currencies across Asia are moving increasingly in tandem, in the orbit of the yuan.
“I think that the crisis can have a salutary effect on Asian integration by highlighting the importance of surveillance,” said Willem Thorbecke, a researcher in Tokyo at the ADB Institute and the Research Institute of Economy Trade and Industry.
Indeed, the 13 parties to the CMIM intend to do just that.
Although diplomats say ASEAN Plus Three showed no interest at recent meetings in developing a coordinated approach to tackling capital inflows, the group is due to open an Asian Macroeconomic Research Office in Singapore next May.
“Asian countries are considering holding each other’s currencies as part of their foreign exchange reserves. If they do, they will have an incentive to monitor economic fundamentals in neighboring countries and to use peer pressure to advocate policies to mitigate vulnerabilities,” Thorbecke said.
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