Asia is emerging as one among the most rapidly growing economies of the world. It has an intergovernmental association called ASEAN which is the most unified regional grouping in the entire Asia. Currently, the Association of Southeast Asian Nations (ASEAN) has 10 member countries i.e. Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar and Cambodia. The monetary system that is being followed across the ASEAN union is diversified due to the membership of different countries. Asia’s monetary unit is a group of currencies of multiple countries. It includes the member countries’ currencies along with the currencies of some of the other countries. The emergence of idea of having a common currency for the ASEAN countries can be traced from Asian financial crisis that occurred in 1997. It drove home the need of greater coordination in the policies among the different economies of Asian region. After the adoption of euro by the European Union, Asia was also emphasised to have a system of common currency. But, ASEAN union is quite different from European Union in varied aspects (Dinga and Vilma 2011). The efforts to shift from multiple currency system to a common currency system seemed to have hindered due to various significant challenges.
Though the financial crisis in Asia has created a need for effective and appropriate monetary policy and the coordination between the different exchange rates in the entire region, the heterogeneous nature of the economies, policies and the regional institutions have prevented the ASEAN union to take decisive move to adopt a single currency. Unlike European Union, Asia lacks appropriate and requisite institutions to switch to a common currency union. On paper there can be various benefits of adopting a common currency by the Association of Southeast Asian nations. At the same time, it has certain costs or limitations attached to it for the ASEAN union. Where the costs of this arrangement are associated with the management of macroeconomic level, benefits are often associated with the microeconomic level because of the transformation of diversified currency system into the common currency is expected to offer gain in the economic efficiency.
The adoption of a single currency for the entire ASEAN union will contribute to the greater macroeconomic stability for those participant countries that have a mixed track record in the area of implementation of monetary policy for their nation before joining the common currency union (Murray and Moxon?Browne 2013). The another benefit of adopting the common currency which has been realised is that it would facilitate the seamless trade of goods, services and investments as well, among the member countries of the ASEAN union, leading to increased revenue generation for both the countries. As the use of common currency will help in reduction of transactions costs of conducting the cross border business and it will also remove the volatility of exchange rates nationwide (Gharleghi, Najla and Benjamin 2015). The implementation of common currency policy could be seen for the countries that have an uneven record of inflationary control and patchy exchange rate management as they will be benefited by the monetary policy formulated by the regional central bank which is more credible. Further, it is an established fact that if the extent of intra-regional trade is large, there will be the more economic benefits of having a common currency for a region. Single currency could avoid the trade disruptions due to fluctuating bilateral foreign exchange rates between the potential participant countries in the common currency. Therefore, it can be said that common currency promotes the predictability and lessens the uncertainty. A currency of the country is like its language. As a unique currency promotes effective communication in between the people, a common currency will facilitate effective trade and investments between the member countries of ASEAN union. In the environment of multiple currencies there would be higher transaction costs and other related costs like cost to be incurred in obtaining information about the prices( Lee and Sharon 2012). Macroeconomic stability can also be emphasised as one of the key benefit of the single currency monetary policy. With the flexible and stable fiscal policy, the participant countries are less required to use their own monetary policy in response to the economic shocks. Also, there would be less inflationary pressures for the currency union (Farhi, Pierre-Olivier and Hélène 2011) Furthermore, the benefits of having a single currency include the reduction in the exchange risk and the stability of prices among the countries (Lee and Azali.2010). The adoption of currency union can make the ASEAN currency as one among the major currencies across the world. Additionally, the currency union among the member countries of ASEAN in combination with the regional integration in the areas of financial services will contribute to strengthening of banking system thereby enabling them in better provision of their banking services (Fraser 2010). This arrangement will ultimately lead to greater coordination among the banking and financial systems of the member nations. It will also lead to improved standards for the banking system of the ASEAN region.
Even when the common currency system has so many benefits of adoption for the ASEAN union, there are certain key constraints in the practical implementation of such idea. Also, the sustainment of such monetary system is more difficult than its adoption. The economists argues that using the system of common currency may lead to losing the scope of setting independent monetary policies for the respective nations by the member countries( Grace and Sharon 2012). There are basically four constraints in the adoption of single currency system like Euro. These are discussed as below:
Diversified degree of economic development of the nations is one of the major causes for ASEAN countries to disregard the option of adopting a single currency across the union. The level and extent the economic development is quite diversified among the ASEAN countries. The stages of development differ more significantly in ASEAN countries than the European Union (Jane et al 2011). The differences in living standards and also the varied economic maturity of different countries could make it more difficult for the ASEAN union to have economic integration and it is difficult to realise the benefits of common currency without further integration. Moreover, when the countries forms a single currency union, they have to give up on the privilege of having an independent monetary policy and even it cannot use tools such as interest rates anymore in order to address the cyclical needs of industries that are country specific or for the financial services(Ngo 2013). So it is in the case of ASEAN countries. If they form a currency union, the member countries will no more be independent to formulate their own monetary policies and they will have to adhere to the policies that will be made comprehensively for the ASEAN union. Since, the economic structure of the participant countries is quite varied; it would be difficult for the countries to cope up with each other in case of common currency. Another reason why ASEAN countries must not adopt the common currency system is the weak financial system of few member countries. After the final crisis in Asia in 1997, it has been consistently facing the fragile banking and financial system as these are heavily dependent on the foreign capital to peg their foreign exchange rates (Petr 2012). The weakness in the banking system is therefore undermining the scope of common currency in the ASEAN countries. Before adopting the single currency system ASEAN will have to restructure its financial sectors along with the banking system and it also requires introduction of various reforms in the financial sectors (Hunter and Krueger 2012). Such initiatives require huge amounts and necessary planning which is not feasible for Asian countries. Followed by the weakness in the financial and banking sector, the other reason why the ASEAN union should not form the currency union is the insufficiency of political preconditions. As there is a lack of preconditions for the monetary cooperation and for the common currency system among the ASEAN countries. From the European currency union experience it is realised that developing the proper political support and the establishment of strong institutions for the common currency union is menacing challenge (Thomas Orawan and Lalana 2010). Further, greater degree of cooperation between the member countries is required to set up the regional institutions that are necessary for adopting a common currency for ASEAN and such need of cooperation is greater than need to support the bilateral pegs between the ASEAN countries. An adoption of the common currency also demands various institutions like common central bank. The breakout of financial crisis at the global level and the problems encountered in the initial time of the euro raised the hopes for the evolution of a single currency in Asia (Wihardja 2013). However, Asia does not seem to be ready to have the currency integration. There are several limitations that are hindering the regional currency union. The common factors include regional heterogeneities in the economic social and institutional aspects. Moreover, the member countries of ASEAN union appear to be not ready for the convergence on the management of common exchange rate and for the framework on monetary policies (Shingo and Ogura 2010) further, the Asian region also lacks regional institutions that can effectively coordinate the exchange rate and monetary policies. The failure of various European economies in managing their fiscal and monetary health in spite of having far more homogeneous economies than the ASEAN countries has made the scope of common currency adoption more distant. More importantly ASEAN do not have a counterpart of European central bank. Lastly, an inadequacy of mechanisms for the resource pooling at the regional level would hinder the monetary cooperation across ASEAN countries. In order to adopt the euro as a single currency European Union had to establish a wide gamut of institutions such as European commission, Central Bank, European council etc. for the purpose of forming the currency union (Grauwe 2016). It would take huge time to develop such bodies in East Asia as there is a total absence of such mechanisms and which is the major challenge of adopting the single currency.
There are various preconditions to the currency union, such as achieving nominal convergence criteria, fiscal rules, and formulation of regional competitive policy, efforts for capital mobility and few other moves towards achieving the integration in the labour market. These were the issues that were duly considered before the European currency union for the euro. Hence, are required to be taken into consideration before forming the currency union for the ASEAN countries (Noer and Titis 2010). Before adopting the single currency monetary union like euro, it is important for Asia to understand the differences in the situations of ASEAN and that of European Union. Firstly, ASEAN do not have the like focal point as of Germany which is the largest economy of Europe having the sound track record of the stable macroeconomic policies. Secondly, Europe is not as much diversified as ASEAN in the areas of development of economic structures of the Asian countries (Song Kuok and Sayed 2010). Even on the basis of economic criteria, the few member nations of ASEAS are less suitable for the formation of currency union than those of European Union. Further, the European monetary union transition arrangement has shown that the road to common currency is full of obstacles.
After identifying the possible benefits and limitations or cost, it is now necessary to understand that even without adopting a common currency, greater degree of the economic integration could be achieved. As it is not feasible for ASEAN countries to adopt the common currency system, due to various constraints as discussed above, it can consider some other alternatives of achieving the reasonably closer economic integration even without losing the considerable economic sovereignty. These alternatives include entering into the commercial agreements and diminishing the short term instability of exchange rate caused by the interventions that do not control the movement of long term currency. Although adaption of such alternatives would require the greater coordination than that is required in bilateral relationships but yet it would certainly amount to safeguarding the economic autonomy of the member nations to a good extent.
Therefore, it can be concluded that the ASEAN countries must not go for the currency union i.e. the monetary policy of adopting a single currency like euro. Looking to the general facts like the geographical direction of trade in ASEAN is vastly diversified and the main currency areas are the significant trading partners for most of the ASEAN countries (Sylvia 2014). It implies that the exposures of ASEAN countries’ to the fluctuation among major currencies is quite higher and yet none of those key currencies are candidates for the common peg (Hyun 2012). Hence, it is not appropriate for the ASEAN to adopt single currency for the union as a whole. It should rather continue with the multiple currency system as it is more suitable for the entire Asian economy and the individual economies of member countries.
References:
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