Letter From Europe
Towards a single Asian currency?
A few weeks ago, the Asian Development Bank, a Manila-based international financial institution, held its annual meeting in Madrid. The Bangladeshi delegation to the meeting was headed by Dr. Mirza Azizul Islam, the finance adviser, who is also an eminent economist and an international banker.
The principal objectives of the bank are to "help its 67 member countries reduce poverty and improve the quality of life of their people." Since the very poor people in the Asia-Pacific area spend 60% of their income on food and an additional 15% on fuel, items which are lately being subjected to relentless price increases, it was not surprising that the members spent a lot of their time discussing how to tackle the situation.
They were concerned that it could undo "the gains in poverty reduction achieved in the past decade of growth," which could, in turn, trigger widespread social and political unrest in the region. However, what did surprise me somewhat was a proposal to introduce an Asian euro, which was discussed at length.
The European Central Bank has just celebrated its 10th anniversary, and the euro will be ten years old in January 2009. So it is an appropriate moment to examine its successes and failures in order to assess whether it is worth pursuing a similar project in Asia.
A bit of history will help us to understand that it has taken a lot of drive, planning, negotiation and hard work to create the euro. There were many obstacles to overcome and many frustrations to endure.
The single-minded pursuit of this objective for nearly fifty years by a number of visionary leaders finally produced this result. In order to avoid another war between Germany and France, two Frenchmen, Jean Monet and Robert Schuman, first put forward the idea in May 1950 of a single economic framework for Europe to cover coal and steel, two essential commodities needed for fighting wars.
It had taken the Europeans 43 years to set the dates for the establishment of an independent central bank and the introduction of a common European currency when, on November 1, 1993, the Treaty of Maastricht was signed.
Besides being a common denominator of over three hundred million Europeans, and a symbol of Europe's shared values, the euro was expected to achieve several economic goals, such as low inflation, eradication of exchange rate volatility, market transparency, and facilitation of commerce inside and outside Europe by being an alternative reserve currency.
Now, almost ten years after the introduction of the euro, the question is: Has it achieved its goals?
It is true that, because of perhaps the worst global economic crisis since the '70s and the skyrocketing food and oil prices, the current economic situation in the EU is not good. It has created political tensions between the governments of member countries and the ECB. President Sarkozy, went so far as to issue a warning to the ECB: "The ECB must ask itself about economic growth not just about inflation."
Despite this warning, the ECB has just raised its benchmark rate from 4% to 4.25% because inflationary pressure weighs more heavily on Trichet's mind than economic growth.
Of course, it does not make Trichet's life easier when the Federal Reserve insists on maintaining the benchmark rate at 2% while, according to the Reuters/University of Michigan Survey of Consumers, one year inflation in the US will rise to 5.2%.
Luckily for Trichet, the Bank of England is maintaining its benchmark rate at 5%. The situation has been further complicated by a widening divergence in the economies of the euro zone countries.
The ever-strengthening euro is also having a negative impact on the area's export efforts. But looking at the performance of the European economy over a longer period (last ten years), and the role played by the ECB in it, I feel that on the whole the euro, besides giving much-needed financial stability, has also achieved most of its objectives.
In the EU, exchange rate volatility has been eradicated, and the euro has established itself as an alternative reserve currency (more than 25% of the world's foreign exchange reserves are now kept in euros). Until very recently, inflation in the euro area was under control.
Unfortunately, because of soaring food and oil prices, it rose to 3.7% in May this year (well above 2.1% in May, 2007), and it seems it will keep on rising. Market transparency has largely been achieved and Inter-European commerce has grown significantly.
Over the last ten years, average economic growth has been slow but steady. Trichet feels that higher economic growth can only be achieved through structural changes in the member countries, which falls outside his mandate. Unfortunately, because of the deteriorating global economic situation, growth in the euro area will be only 1.7% in 2008, well below 2.6% of last year.
Now that we have seen that the euro has, on the whole, been beneficial to the member countries the question is: Is it a viable proposition to pursue a similar project in Asia?
Speaking about the enormous difficulties encountered by the European leaders in creating the euro, Lamfalussy, who was the president of the European Monetary Institute, the forerunner of the ECB, stated recently that the leaders were able to overcome those difficulties because of their determination to set aside their national concerns for the ultimate goal of achieving a common currency.
Do the Asians, or at least some Asian countries, have the political will to set aside their national concerns for the sake of a common currency? Do they have the discipline required to put their own houses in order, despite their heterogeneous economies, as preliminary work before the introduction of a common currency? Will their political systems allow them to establish a truly independent central bank and will they submit to its dictums with rigour?
Actually, Japan, China, South Korea and the ten-member Association of Southeast Asian Nations have already taken timid steps towards the creation of a common economic club. In a recently issued joint communiqué, they expressed their agreement to transform the bilateral currency swap arrangement with a pool of at least $80 billion, called the Chiang Mai Initiative, "into a self-managed reserve pooling mechanism governed by a legally binding single contract."
This is a good start. If the political will persists, I do not see why, with patience and hard work, the goal of a common Asian currency cannot be achieved in the not too distant future.
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