Five lessons for East Asia from euro crisis

TUESDAY, AUGUST 07, 2012
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Mechanisms need to be in place for crisis prevention and resolution before the next economic crash, and therefore the East Asian regional financial architecture needs to be reformed, warns Ulrich Volz, senior economist at the German Development Institute.

Giving a public lecture at Chulalongkorn University on lessons from the current European crisis for regional monetary and financial integration in East Asia, Volz yesterday said there were five lessons to be drawn. These are: don’t rush with monetary integration, rethink costs and benefits of international financial integration, bolster crisis prevention and resolution mechanisms before crises hit, strengthen surveillance and monitoring of regional financial markets, and recapitalise banks swiftly after any crisis.
He explained that he did not mean that financial integration was bad per se.
“There is still a strong case for monetary and exchange-rate cooperation in East Asia, but over-ambitious monetary and exchange-rate integration schemes will backfire,” he said, referring to the threat of the collapse of the euro.
He said East Asian countries were not ready for a regional exchange-rate system, let alone monetary union.
A high level of political agreement and commitment is needed among countries to pursue successful monetary integration, as well as close macroeconomic and fiscal coordination, he said.
The current crisis highlights the dangers that advanced monetary integration brings in the face of economic and political divergences, he noted.
Volz said the European crisis highlighted once again that international financial integration will not automatically lead to efficient allocation of capital and that it contributes to the development of unsustainable imbalances.
International financial integration increases contagion risk. East Asian countries should be careful about liberalising financial markets too fast, he said.

VERY GRADUAL APPROACH
“East Asia should pursue a very gradual approach to monetary integration that allows for much flexibility and room for adjustment.”
He said Asia had strong links to the US dollar that created the problem of high exchange-rate volatility for the region. He suggested managed floats guided by currency baskets as one option to keep relative intra-regional exchange-rate stability.
He urged Asean+3 (the 10-member bloc plus Japan, China and South Korea) to increase efforts to improve financial architecture – an emergency credit-line agreement known as Chiang Mai Initiative Multilateralisation.
The credit line of US$240 billion (Bt7.56 trillion) is very small, as each member can draw only 30 per cent of its allotment in the fund, beyond which it must ask for assistance from the International Monetary Fund, he said.
He also encouraged the region to strengthen surveillance and monitoring of regional financial markets. More resources need to be devoted to the Asean+3 Macroeconomic Research Office, a regional financial-surveillance body, he urged.
In regard to the banking sector, he suggested that policy-makers respond swiftly to banking crises with swift recapitalisation. He blamed European leaders for acting too slowly to clean up the banking sector, like Japan did in the past, contributing to that country’s “loss decade”.