Asia: currency union on the agenda?

Some ideas take a long time to emerge from governments as policies, especially when they involve painful choices. But the old chestnut of an Asian currency agreement may be moving back onto the regional agenda.

The idea has come up several times recently in discussions between economists and policymakers, most notably in connection with the finalisation in March of a $120bn currency swaps agreement between 13 Asian nations.

The deal, awkwardly named the China Mai Initiative Multilateralisation agreement, is intended to provide emergency US dollar liquidity to countries facing a foreign exchange crisis. Theoretically, it could help pave the way for a currency union, or something slightly less ambitious.

The problem is, there don’t seem to be any takers. Zeti Akhtar Aziz, governor of the Malaysian central bank, was probably speaking for most of the region’s policymakers when she told the FT in Kuala Lumpur in October that currency union would do more harm than good.

Against that background it is intriguing to see the Asian Development Bank suggesting in its latest Economic Monitor that an Asian Monetary Unit could help to reduce currency tensions between east Asia’s increasingly large and integrated economies.

An AMU - sometimes called an Asian Currency Unit - would not amount to currency union along the lines of the European Union’s euro zone. However, it would create a basket of currencies - potentially involving the 10 members of the Association of South East Asian Nations plus Japan, China and South Korea.

Such an arrangement could be used help keep regional currencies stable against each other within the basket, while allowing the AMU to fluctuate relative to currencies elsewhere.

Alternatively, the ADB says in its latest Economic Monitor, east Asian currencies could be directly pegged together, allowing them to float jointly against external currencies, or the countries concerned could go the whole hog and form a monetary union with a common currency.

The ADB’s economists accept that if there was ever any chance of the latter, given Asia’s widely differing political and cultural arrangements, it has probably disappeared in the wake of the European sovereign bond problem. That crisis has exposed the need for fiscal mechanisms to mirror monetary union, adding to the loss of sovereignty involved.

However, the bank says the benefits of currency cooperation in Asia would be so large that it is worth exploring whether countries will agree to a minimalist regime of informal reference rates for the region’s exchange rates, which might help to reduce intra-regional volatility over time.

That is where Chiang Mai comes in - the multilateral agreement includes precisely such an arrangement for independent surveillance of regional economies so that objective decisions can be taken on which countries should get help from the fund, and when.

As others have pointed out, the inelegantly titled Asean + 3 Macroeconomic Research Office, based in Singapore, could be seen as a significant first step towards institutionalizing regional financial cooperation in East Asia.

As a reality check on possible progress, however, it’s worth remembering that it took 12 years for the original Chiang Mai agreement, reached in the aftermath of the 1997/98 Asian financial crisis, to develop into a multilateral body capable of taking independent action.

A parallel proposal for an Asian Monetary Fund, along the lines of the International Monetary Fund, has made even less progress, even though it was put forward in 1997 by Eisuke Sakakibara, then Japan’s deputy finance minister.

The idea continues to surface in policy discussions, notably in Japan, with supporters such as Masahiro Kawai, dean of the Asian Development Bank Institute in Tokyo, also saying an AMF could promote exchange rate stability.

But neither the AMF nor the AMU are at the top of any government’s agenda, which means that neither are likely to make much progress - unless Asia suffers another shock along the lines of 1997/98, of course.