Wednesday, May 18, 2011

ASEAN Monetary Union: First Things First

ASEAN finance ministers, along with finance ministers from China, Japan and Korea, have been reviewing an internal study on adopting a common currency.  Although it is always good to conduct long-term analyses, moving too fast on a common currency would be detrimental to the AEC.

In short, ASEAN (with or without the “3”) needs to walk before it can run.  The EU experience with the Euro shows that too much divergence in fiscal policies within a monetary union can be hazardous to financial health.  The EU has been dealing with these problems even though they have a unified market for goods and services, which the AEC will only begin to have in a basic form by 2015, and even though they have supra-national institutions such as the European Central Bank, which ASEAN members do not want to encourage.  Attempting monetary coordination without strong supra-national institutions would risk replicating the mistakes made by the defunct European Monetary System.  As complicated as these issues are within ASEAN itself, they multiply many-fold when the “plus 3” are added to the equation.

ASEAN or Asian monetary union thus should be seen as a very long-term goal, and perhaps viewed more as a proxy for discussions on further use of the Chinese yuan as a major trade currency.  Whether or not that will happen will depend on Chinese policymakers, but the broader economic forces are there.  In the meantime, ASEAN needs to focus on the 2015 AEC at hand before moving on to currency union.