Euro crisis’ lessons for East Asia
East Asia could learn two valuable lessons from the euro zone crisis. First, do not rush the process of financial and monetary integration; and, second, develop adequate institutional frameworks before proceeding.
In fact, East Asian countries are unlikely to move towards a regional fixed exchange-rate system or a monetary union with a single currency in the immediate future, owing to the region’s great diversity in terms of economic and political conditions. Perhaps, in a few decades, the region’s countries will develop institutions to promote financial integration, such as a single bank supervisory agency of the type that the European Union is now creating.
Nevertheless, Asian policymakers should improve cooperation mechanisms designed to prevent and manage crises. Most promising is the Chiang Mai Initiative Multilateralization (CMIM) of ASEAN+3 — the 10 members of the Association of South-east Asian Nations plus China, Japan, and South Korea. This US$120 billion (S$147 billion) regional reserve pool was launched in 2010 to provide short-term liquidity to members in an emergency.
ASEAN+3 is now strengthening CMIM by doubling the total fund size to US$240 billion and the group has agreed to enhance its flexibility by reducing the minimum portion of crisis lending to be tied to the International Monetary Fund’s (IMF) lending programme from 80 to 70 per cent.
CONSTRAINTS IN SAFETY NET?
CMIM has yet to be tested in a crisis. In its infancy, it might not be able to provide adequate emergency support in a timely and flexible manner. The US$240-billion fund is small, amounting to only about 1.5 per cent of the region’s GDP. European experience suggests large-scale systemic shocks call for greater financial support.
Unlike the IMF or the European Stability Mechanism, CMIM contributions are self-managed by the respective country’s authorities. And countries may choose not to contribute to a swap request. This suggests that CMIM could be especially constrained amid a systemic shock or political disputes among member countries.
Moreover, an “IMF stigma” remains among those countries in the region that were discontented with the fund’s role during the 1997-98 Asian financial crisis. IMF conditionality for the activation of the majority of their borrowing could make countries reluctant to turn to CMIM for support. Another challenge is CMIM’s limited capacity for economic surveillance and monitoring.