The lessons Europe has to offer for Asia's monetary integration

By: Wolfgang Munchau

If you replace the “E” in some our European acronyms with an “A”, you get to the nutshell of one of the hottest debates in Asian economics: the debate about future monetary integration. There is talk about an Acu (an Asian currency unit), or an Amu (Asian monetary union). This raises the question to what extent the European experience offers any lessons.

Asian monetary integration has become a progressively important issue since the Asian financial crisis 10 years ago and some of the parallels with European monetary integration are striking.

ADVERTISEMENT

Asia is currently at a stage in which the discussion focuses on regimes to stabilise intra-regional currency fluctuations. The Europeans were at the same stage in the 1970s, when they set up the European Monetary System after a series of failed attempts to stabilise exchange rate movements. The EMS, not the euro, is most relevant for the Asian discussion today.

Both in Europe and in Asia, the process of monetary integration was triggered by a shock. For the European Union, the common shock was the breakdown of the Bretton Woods system in the early 1970s. For Asia, it was the financial crisis 10 years ago.

There is one important difference, however. In Europe, politicians soon took ownership of the process. Helmut Schmidt, the former German chancellor, and Valéry Giscard d’Estaing, the former French president, were both instrumental in creating the EMS and they succeeded in spite of opposition from many economists and central bankers, including the Bundesbank.

In Asia, by contrast, the debate is still playing a safe distance below the top political level. As of Monday, this is a discussion among academics, central bankers and other experts – many of those who attended this weekend’s annual meeting of the Asian Development Bank in Kyoto.

But it would be a mistake to dismiss the process of Asian monetary integration for this very reason. In Europe, too, the politics behind monetary integration did not fall out of the sky. It would never have happened without the previous 20 years of trade integration within the European Economic Community. In terms of trade integration, Asia is also making enormous strides.

In a well-argued ADB working paper, the economists Michael Plummer and Ganeshan Wignaraja made the point that the two types of integration complemented each other*. It is already apparent that the “noodle-bowl” effect of overlapping trade agreements in the region is far from optimal. The case for an arrangement akin to Europe’s single market would be far more sensible.

If and when such a process unfolds, the need for a monetary integration will grow. Last week the Korea Institute for International Economic Policy and the Euro50 Group, a group of European economic experts of which I am a member, organised a conference about the future economic integration in Asia. At that meeting, Eiji Ogawa, professor of economics at Hitotsubashi University in Tokyo, argued that Asia was suffering from a co-ordination failure in its exchange rate policies. Some, such as Japan, Korea and the Philippines, have flexible exchange rates; others, such as Thailand and Singapore, have regimes of managed floating rates, while other groups have fixed rates or currency boards. Any sharp movement in the US dollar exchange rate could have severe implications for intra-regional Asian exchange rate stability.

There are many unanswered questions about how monetary integration in Asia should proceed. Should Japan take part and should the yen form an anchor for the system, in the way the D-Mark was the anchor currency of the EMS? Would that be acceptable to others, such as China and Korea? Would there have to be entry criteria similar to the EU’s Maastricht criteria? Does one need any arrangements for fiscal policy as well?

Another important question is whether the intra-regional stabilisation should occur by means of a fixed or semi-fixed exchange rate against a basket of international currencies, or whether it should be based on a free-floating regional monetary unit, an Acu, to which each member currency would be tied. In the latter case, there would be some obvious parallels to the Ecu, the European currency unit, the basket currency that preceded the euro. My own preference would be for a free-floating basket currency to stabilise intra-regional fluctuations.

Apart from the many technical features, there is one important lesson from Europe. Monetary integration is difficult, it takes time and it may appear impossible at times. But once the process is under way, it develops its own momentum.

*The Post-Crisis Sequencing of Economic Integration in Asia, ADB working paper, www.aric.adb.org

Copyright The Financial Times Limited 2007

---