Euro Turmoil Gives Asia Shivers

East Asian nations such as China and Japan may go cautious on any monetary integration plans.
An analysis by Parameswaran Ponnudurai
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Japanese yen and Chinese yuan banknotes in Shanghai, China, Nov. 12, 2009.
Japanese yen and Chinese yuan banknotes in Shanghai, China, Nov. 12, 2009.

The current euro turmoil is discouraging East Asia's cash-flush, rapidly growing economies from pursuing a long desired objective of forging monetary union in the region, experts say.

As the prospect of debt-laden Greece abandoning the single European currency rises and the debate about a domino effect intensifies, East Asian countries themselves are realizing the difficulties of achieving any regional balance between monetary policy and fiscal discipline, the crux of the euro crisis.

Global markets swung wildly amid the euro uncertainty this week and world leaders gathering at Camp David Friday for a two-day summit are expected to focus on Greece, which some experts say could default on its debt and leave the eurozone in disarray.

Following a similar financial crisis that struck East Asia in 1997, economies in the region moved to establish a foreign exchange reserve pool to cushion it from financial shocks in what was to be the first step towards a long term goal of monetary union or having a single regional currency.

The euro crisis may have dealt a psychological blow to any such plans as governments in Asia face fiscal and other financial problems of their own, including difficulties in meeting deficit-reduction goals in their strong pursuit of economic growth.

"The European crisis is teaching us a lesson," Zhang Yuyan, Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences (CASS) told a forum organized by the Center for Strategic and International Studies (CSIS) in Washington this week.

Monetary or currency cooperation among nations in the region "will be very difficult," he said when asked on the importance of "currency disciplines" in negotiations to knock down barriers in free trade agreements.  "Years ago, people were interested in doing that but now they have gradually given up that idea."

Zhang cited current moves to create a nine-nation free trade agreement in the Asia-Pacific region known as the Trans-Pacific Partnership (TPP) pact, saying currency and monetary cooperation has been a "missing part" of the negotiations involving the U.S., Australia, New Zealand, Chile, Peru, Singapore, Vietnam, Malaysia, and Brunei.

Trade and investment

Some experts believe that while caution prevails in East Asia on monetary integration, the euro crisis should not deter regional efforts to free up trade and investment.

"The situation in Europe is extremely serious and frankly scary," said Matthew Goodman, a former senior White House official who oversaw U.S. policy development in Asia-Pacific groupings such as the Asia-Pacific Economic Cooperation (APEC) and the East Asia Summit (EAS) forums.

[It] may be a lesson for East Asia about the hazards of currency union, particularly without full fiscal union, and the sovereignty implications of that, which I think we are a long way from in Asia. But it should not send a chilling message to the rationale for trade and investment integration in the region," said Goodman, now an expert at CSIS.

China, Japan, South Korea, and the 10 Association of Southeast Asian Nations (ASEAN) member states Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, and Vietnam set up a common fund to fight a potential liquidity crisis after the region plunged into its worst recession following a severe currency meltdown in 1997.

Chiang Mai

Concerned over the devastating contagion effects of any escalation in the euro crisis, the ASEAN Plus Three countries decided this month to double the size of the their regional currency swap pool, known as the Chiang Mai Initiative Multilateralization (CMIM), to U.S. $240 billion.

They also decided to increase the amount countries can access without conditionalities imposed by the International Monetary Fund.

The Chiang Mai initiative began as a bilateral currency swap facility, but after the 2008-09 global economic crisis stemming from a U.S. housing mortgage meltdown, it grew into a multilateral facility.

Some had viewed the evolution of the Chiang Mai plan, intended to provide emergency U.S. dollar liquidity to countries facing a foreign exchange crisis, as laying the groundwork for an Asian Monetary Fund, along the lines of the International Monetary Fund, with China at its core.

But "that is a step which is far beyond the horizon of what is happening in East Asia," noted Shujiro Urata, a professor of economics in the Graduate School of Asia-Pacific Studies of Waseda University.

"That is as far as East Asia can go," he said, citing the Chiang Mai initiative.

"They are not really thinking about a common currency because they  just observed what is happening in Europe," Urata said.

"One important reason behind what is happening in Europe is that there is a common currency [and] one central bank, but there is no coordination or cooperation in the fiscal area and that is one of the reasons why they are having a problem," Urata said.


The 13 countries under the ASEAN Plus Three framework have also set up a Macroeconomic Research Office known as AMRO in Singapore, seen as the beginning of efforts to institutionalize regional financial cooperation in East Asia.

The regional currency surveillance body is designed to coordinate the decision-making process for providing emergency liquidity to member states under the CMIM scheme.

The office began operating from October last year and member nations have sought "to accelerate the preparation to institutionalize AMRO as an international organization."

"Some would interpret it as the prelude to the emergence of  [the] Asian Monetary Fund," said Hank Lim, an expert at the Singapore Institute of International Affairs (SIIA), a think tank. "It could but it is a long way from the original intention of Chiang Mai Initiative Multilateralization program," he said at the Washington conference.

For the Chiang Mai initiative to be effective, it is essential that AMRO becomes stronger and more capable, said Chalongphob Sussangkarn, an expert at the Thailand Development Research Institute.

"Building up AMRO’s capability and credibility is now the biggest challenge for increasing the CMIM’s effectiveness," he said.

AMRO, he said, needs to develop close links with other regional organizations, such as the Asian Development Bank and the ASEAN Secretariat based in Indonesian capital Jakarta, as well as the IMF, the World Bank, the Bank for International Settlements, and other monetary organizations around the world.

"In the longer term, AMRO should not simply act as a research office; it should evolve into a regional monetary organization for East Asia, supporting the CMIM as well as carrying out technical activities to support financial cooperation in the region."

This may include macroeconomic policy cooperation and coordination, a focus on regional financial regulatory frameworks, and capital market development, as well as working to support the region’s longer-term financial and monetary integration, Sussangkarn said.





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