Should ASEAN even consider a single currency?
The foundation the ASEAN Economic Community (AEC) is targeted for 2015. Some might assume that such economic integration will invariably lead to monetary integration as it did in the European case. In light of recent events it is clear that the European model needs some reconsideration and that any steps towards ASEAN monetary integration should be taken with caution.
The first question regarding monetary integration is plainly what benefits it would bring. The benefits of having a single currency are usually considered to be lower transaction costs, reduced exchange risk and price stability. In addition to this, it is tempting to think that a single ASEAN currency would become one of the major currencies in the world and enhance ASEAN’s role as a global player.
While the benefits of trade integration can be enjoyed without too many prerequisites, the benefits of monetary integration – especially a single currency – are harder to attain. When countries enter a monetary union they give up the power of monetary policy. They consequently have to accept the interest rates set by the regional central bank and cannot use interest rates to smoothen their business cycle. Therefore, one of the preliminary criteria for an optimal currency area (OCA) – a theory pioneered by Nobel laureate Robert Mundell – is that the countries in a currency area follow very similar business cycles. Other important criteria include macroeconomic stability and similar level of economic development.
The Eurozone clearly does not fulfil these criteria. There are big differences between the economically mature countries of France, Germany and the Benelux compared to Ireland, Greece, Portugal and Estonia. The macroeconomic instability of the latter group has manifested itself in the past few years. The business cycles between the two groups are also not similar enough for the monetary policy to be able to serve everyone’s needs. The interest rates in the Eurozone have generally been very moderate, which is perfect for the economically mature, whereas Ireland on the other hand would have needed higher interest rates to cool down the economy which was growing at a very rapid pace before the crisis of 2008.
Same arguments apply to ASEAN. Levels of economic development differ even more than within Europe. The ASEAN countries that have a higher share of services and manufactured goods in their GDP have very different business cycles than those countries that rely more on the production of raw materials. Most countries in ASEAN have not yet reached economic maturity. For some countries there is a lot of room for growth, and some are already growing very rapidly. Such take-off growth periods are not that of stability.
Stiglitz also said in his interview that there had been a general recognition when the eurozone was founded that Europe actually was not an OCA. Many hoped that when the time would come further actions would be taken to make the euro work. No one at that time foresaw the magnitude of the actions required to solve the problems Europe now faces.(1)
That can be a valuable lesson for ASEAN. The benefits of a single currency can only be enjoyed when the region has become an optimal currency area. Attempting a single currency before that time may lead to expensive bumps further down the road.