Do East Asian Nations really need Monetary Integration?

      Having experienced a severe crisis in 1997, many of Asian countries nowadays turn their attention to the issue about financial stability. Most countries, obviously China and Japan, rely on accumulation of reserve as a means to prevent another crisis from happening, ensure short term stability. However, it is widely argued that with increasing liberalization of capital, crisis may not be avoided due to a weak domestic financial market. A lot of empirical evidences have confirmed that country with weak banking system was crisis prone. The U.S. in 1930s and Thailand in 1997 are prominent examples. In addition, pegging currencies to the key one like the USD in preference to foreign exchange market intervention could be problematic in terms of the loss of their own monetary control. The recent crisis in the western world has indicated that since financial markets have been increasingly globalized, it was necessary for monetary authorities in East Asian to perform domestic rate cuts in response to monetary stimulus launched in the States. This even accelerates inflationary pressure that had already taken place as a result of their faster growths. The real exchange rate consequently became appreciated. ฺNot so doing, the higher interest rates may result in massive capital flow and hence nominal appreciation of currencies, which was what Asian emerging market try to avoid, according to their faiths on export-led growth.

       Accordingly, one may say that monetary cooperation at the regional level is needed to bring the benefits of both short run stability and long term growth. By providing adequate liquidity for member countries, it can entrust them in prevention of crisis. Also, institutional improvement can occur under cooperated monetary union in a sense that it would encourage domestic investors to exploit their excessive savings properly through the stronger financial system. This is said to be supportive to long term growth. Therefore, why don’t we establish some kind of Asian Monetary Union, as a success of EMU is now perceived?

       Arguments of the need to have regional monetary cooperation in East Asia remain controversial, especially in form of common central bank and single regional currency. Taking a look at what has happened in Europe, we could see that currently-existing cooperation among East Asian countries differs from that in Europe, which has been presented successfully and practically for decades. In Europe, monetary integration was first motivated by a goal of political unification. Their policy commitments are quite consistent with each other. This is something that East Asian nations has not found important largely because of the diversity of characteristic among countries and heterogeneous pattern of national interests. For instance, Japan, China, and small nations in South East Asia are so different in terms of their position in international politics. For economic reasons, the distinction between domestic policy objectives makes the monetary cooperation difficult. Several regional central banks aim at domestic price stability, and thus exchange rate become more flexible. Few central banks (Hong Kong as the center of regional trade) are concerned with exchange rate stability. While the giant one like China cares about value of her currency. They even think of financial integration as impediment to capital control mandates which they rely on in order to intervene foreign exchange market without affecting internal balance and domestic monetary practices. In fact, capital is nowadays highly mobile. As a result, the use of monetary measures together with exchange rate instruments has been limited. Pursuit of price stability requires those monetary authorities to sacrifice stable exchange rates. They, therefore, may not be willing to coordinate economic policy through the channels that Asian Monetary Union provides.

       In East Asia, apart from reasons mentioned above, there are more evident reasons why the countries in the region are far from achievement of having common currency. First of all is asymmetry of shock. Countries face different macroeconomic condition among each other. As we know that the U.S. is now facing huge current account deficit. Her USD currency stays depreciate against those in East Asia in which the degree of appreciation varies among nations; Yuan appreciation rate, for instance, is slower than the other’s. This would create the difficulty in reaching optimum currency area. Furthermore, most importantly, even if the countries’ openness is favorably high and movement of products and resources is quite free, the involved authorities in the region do not support appropriate institutions.

       In case of EMU, it spent 5 decades evolving common central bank and single currency. Various forms of institution was established to keep exchange rate fluctuating within narrowly defined limit for ERM, to require each member to tightly stabilize its currency bit by bit for EMS, and to provide sufficient short term liquidity to support all necessary exchange rate intervention for EMCF, as an illustration. This is very significant for the long run scheme of monetary integration. What Asian countries only have is awareness of a need for economic and monetary cooperation to achieve financial stability in short term (crisis avoidance) represented by two institutional actors: 1) CMI, which conduct surveillance to prevent crisis and 2) sources of Asian Bond Fund. Accordingly, regional economic institutions necessary for monetary integration to work well still remain in infancy.

      In addition to those tough concerns, common problems that European Union used to experience are anticipated to happen to East Asia monetary cooperation roadmaps: sovereignty issues and differences in culture and languages. The problem could be even intensified in the region of diversity like this. Considering rigid conditions for a new entry that is hard to be met, the country may hesitate to sacrifice its own monetary authorization in return for the benefits of adoption of common regional currency and joint central bank. In my opinion, the optimal solution should not be the creation of fully integrated monetary authority. Rather, monetary stability could occur if domestic monetary and fiscal discipline would be sufficiently strong and the banking sectors would be strengthened.