There’s a certain irony to the Asian Development Bank (ADB) holding its annual meeting in Europe.
The Manila-based lender did so this week in Spain, one of the 11 nations that in 1999 embraced a single European currency. The euro area has since grown to 15 members and many in Asia want to replicate the enterprise. Much of the talk in Madrid surrounded accelerating that process.
There’s no firm timetable, nor do Asian leaders regularly refer specifically to an Asian euro. They prefer to couch it in terms such as “regional integration” and “economic interconnectedness.” The ultimate goal is a common Asian currency shared by as many as 16 economies.
That ambition made the location and timing of this year’s ADB meeting strangely apropos, just as the euro suffers tensions of its own. There’s much Asia can learn from Europe’s experience.
The euro improved economic efficiency in a region with output comparable with the US’. Exchange rate volatility has been eradicated and financial markets are deeper and more flexible. Intra-European trade has blossomed. The euro is becoming a viable alternative to the dollar, which has fallen roughly 45% over the last six years.
Europe’s monetary union isn’t perfect. One problem is the euro’s strength, which is crimping exports. There’s a bigger one: European Central Bank (ECB) policies are at odds with the conditions of some economies. Spain is a case in point. Europe’s fifth biggest economy is grappling with the fallout from a housing bubble.
In recent years, weakness in economies such as Germany prompted ECB to pursue accommodative monetary policies. That was hardly what Spain and Ireland needed and the result was predictable American-style asset bubbles.
Now that Germany is performing well, Italian prime minister-elect Silvio Berlusconi and French President Nicolas Sarkozy want ECB to cut interest rates. Europe’s experience demonstrates the difficulties of one central bank controlling money in more than a dozen separate economies.
Travelling around Europe, one also hears much griping about how the introduction of the euro sparked inflation that isn’t captured in official data. Anyone who visited Italy, Portugal or Spain before and after the euro may be tempted to sympathize with such theories.
Europe’s troubles may pale in comparison with what Asia will experience on the road towards its own single currency.
It took Europe 30 years of planning, negotiation and hard work to create a single currency. The process unfolded amid relative trust after World War II. The continent was endeavouring to maintain peace and build prosperity at a time when the US and Soviet Union were engaged in an arms race. Asia lacks anything approaching that trust. Tensions over the past mean its three biggest economies—China, Japan and South Korea—are barely on speaking terms. Hu Jintao’s trip to Japan this week is the first by a Chinese president in a decade and marks an important step forward. Asian relations still have a long way to go.
In Europe’s case, political will to integrate helped overcome economic hurdles. In Asia, politics are a big hurdle.
“I can’t see any political will within Asia for the creation of a totally independent monetary authority like the ECB,” says Simon Grose-Hodge, strategist at LGT Group in Singapore. “None of them would agree to such an organization unless they ran it.”
Asia’s economies are far more disparate than Europe’s. Take the 10-member Association of Southeast Asian Nations, or Asean, which exists to promote regional growth and cooperation. It includes economies that aren’t remotely comparable. Singapore’s per capita income is about $29,000 (about Rs11,6 lakh), while Cambodia’s is $500 and Myanmar’s is so low that the World Bank doesn’t even list it.
The region also lacks a European Union-like structure, a North Atlantic Treaty Organization-like alliance or an Organization for Economic Cooperation and Development to push integration. Still, officials at ADB are working to catalyse the process.
In Madrid this week, finance ministers from 13 Asian nations agreed to create a pool of at least $80 billion in foreign exchange reserves to be tapped by nations in case they need to protect currencies.
“Asia is coming together slowly, but surely,” says Masahiro Kawai, dean of the Asian Development Bank Institute in Tokyo. “There is very clear momentum in that direction.”
The wildcard is how the current food-price crisis affects cooperation. Jong-Wha Lee, head of the ADB’s office of regional economic integration in Manila, says the events of 1997 brought Asia together. “The crisis was a watershed,” he says. “It sharply focused the region’s attention on its interdependence and shared interests.”
The question is whether surging commodity prices and resulting increases in poverty will hinder regional integration. Will the increasing scarcity of food, energy and other commodities fuel a return to an every-nation-for-itself mindset? Only time will tell.
None of this means an Asian euro is doomed. Yet the idea that Asia can achieve what Europe did anytime soon is fanciful. And given the challenges Europe faces, one wonders if it can muster the will to try.
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