The Euro Could Have an Asian Sibling One Day
A decade ago, the euro was born amid much uncertainty. Prestigious economists shook their heads when pondering the infant's prospects of survival. But after a decade, the kid has grown up healthy and strong, even exceedingly so.
Today, European monetary integration is studied with interest in East Asia, in order to draw lessons applicable to the region. The 1997 crisis caused much social and economic pain and showed that also Asian tigers were vulnerable to economic turmoil, especially if they movedin an uncoordinated manner. Back then, there was much talk of financial contagion: stock markets, currencies, whole economies went down one after the other; individually, they were just too small to withstand massive speculative attack.
The governments in the region (pushed by international agencies such as the IMF, the World Bank, and the Asian Development Bank) understood the problem and took the process of regional economic integration into their own hands. Before the crisis, integration, mostly industrial in nature, was led by Japanese multinationals and by the business networks of the Chinese diaspora, with little government intervention. Even ASEAN (Association of South-East Asian Nations, the supranational entity established in 1967) never went beyond making the first steps toward a free market area.
In December 1997, an informal meeting gave rise to ASEAN+3 (where the three are China, South Korea, and Japan), having the objective of putting in place forms of financial and currency collaboration to reduce the risk of another systemic crisis. Two years later the process was institutionalized. Other agreements followed until the Chiang Mai Initiative (CMI) was launched in May 2000, which has been further integrated and broadened since.
All these are bilateral and multilateral agreements to pool reserves in case of speculative attacks against a given national currency. After the Bali meeting of 3 May 2009, the total amount of reserves pooled stands at $120 billion, 80% of which are supplied by China, Korea, Japan, and the remaining 20% by the 10 original members of ASEAN. There are ceilings on the maximum amount a country can borrow. Naturally, the CMI has compelled countries to coordinate several aspects of policy. In particular, the semester meetings of ERDP (Economic Review and Policy Dialogue) intend to put under control major macroeconomic variables, in order to avoid nasty surprises and quickly implement policy measures. In such a context, rules on information exchange and voting have been discussed, in spite of widespread defensiveness in the region against foreign interference. Most decisions must be taken unanimously.
This whole process recalls the European Monetary System developed with the ECU, the currency unit made of a basket of European national currencies. There were 14 devaluations (or realignments, in official parlance) between March 1979 and September 1992, the last of which just six months before signing the agreement that gave rise to the Economic and Monetary Union and the euro.
The issues East Asian economies have to deal with are complex and sensitive. For instance, political and economic leadership in the region is still contested between China and Japan. Maybe twenty years will not suffice for monetary integration. Maybe a national currency will hegemonize all the others in the region. Alternatively, the euro could well one day have an Asian sibling, the easo...