HindustanTimes.com Thursday, August 7, 2003 East Asia to study goal of common currency system Reuters Manila, August 6 Haunted by the spectre of a repeat of the 1997-98 currency crisis, Asian finance ministers plan to take a fresh look at whether they should emulate Europe and work toward the long-term goal of a common exchange rate system. A report submitted to East Asian ministers, who began two days of talks in Manila on Wednesday, acknowledged that their economic and political diversity might make the issue of monetary union seem remote. But the report, a copy of which was obtained by Reuters, said that intra-regional trade and investment would certainly rise given the speed at which countries were liberalising. "While it is impossible to predict at this time how long it will take for these activities to rise to such a level where policymakers would seriously look at monetary integration as the next logical step in their economic integration efforts, this possibility must be taken into account in the consideration of (an) appropriate exchange rate regime or exchange rate coordination arrangement," the report said. To help them chart a way forward, ministers plan to establish a research group to examine what lessons Asia can learn from the experiences of the European Monetary System, the precursor of Europe's single currency. The group will consist of finance ministry and central bank officials, backed up by research institutes and academics, from the 10-member Association of South East Asian Nations plus China, Japan and South Korea (ASEAN Plus Three). To head off a repeat of the 1997 crisis, when a sudden exodus of hot money caused regional currencies to topple like dominoes, ASEAN Plus Three has spun a web of central bank currency swaps to provide the ammunition to fend off any new speculative attack. In another move toward greater regional self-sufficiency, the group is also redoubling efforts to deepen local-currency bond markets and set up a pan Asian bond market. To this end, the ministers will agree in a communique to be issued on Thursday on a two-prong approach towards developing their capital markets, according to a draft of the statement. TOWARD A REGIONAL IMF? The first track involves building up capacity in areas such as regulation, clearance and settlement. The second strand involves initiatives to foster greater cross-border collaboration among ASEAN capital markets. But the terms of reference for the proposed research group said these initiatives represented a piecemeal approach to building up a regional self-help mechanism. What was needed, the paper said, was to look at how these efforts could be knitted together within a new financial architecture for ASEAN Plus Three, perhaps along the lines of a regional monetary fund. The International Monetary Fund, which functions as a credit union with a strong administrative core and powers to impose stiff conditions on borrowers, might be one model for Asia. "The transformation of the European Union into a monetary union, through which its self-help and support mechanism is established as an integral part, is another development that can provide a valuable lesson and guide," the paper said. Europe took half a century after World War Two to progress from economic cooperation to a single currency. In Asia, which runs the gamut from super-rich democratic Japan and Singapore to poor, authoritarian Laos and Myanmar, the challenge of devising an appropriate currency system would seem too daunting to contemplate. But the terms of reference for the research group said the resulting financial stability could provide a significant boost for intra-regional trade and investment as well as the development of regional bond markets. "Despite the divergence, it may be worth exploring whether there is benefit in adopting a common exchange rate system or some kind of exchange rate coordination that could result in greater stability of the regional currencies," the paper said. © Hindustan Times Ltd. 2003. Reproduction in any form is prohibited without prior permission