The European Monetary Union and the Euro crisis: Lessons for ASEAN

Transcription

1 The European Monetary Union and the Euro crisis: Lessons for ASEAN 2 nd Asian Business Conference Asian Institute of Management, Manila, June 26, 2014 Laurent L. Jacque The Fletcher School (Tufts University) and HEC School of Management (France)

2 Outline The Path to European Monetary Union and the parallel with ASEAN Are/were the Economic Community and ASEAN Optimal Currency Areas? The Way Forward : is the Euro Doomed? Lessons for ASEAN

3 Stages of Economic Integration Abolition of Intra- Zone Tariffs Common External Tariffs Freedom of Movement of Factors of Production Common Central Bank and Monetary Policy Centralized Fiscal Budget & Policy Single Currency 1 Free Trade Area 2 Customs Union 3 Common Market 4.1 Monetary Union 4.2 Fiscal Union 4 Economic Union

4 Historical Roots Treaty of Rome (1957): heydays of Bretton Woods European Monetary System: Maastricht treaty (1992).Soros vs. pound sterling! The parallel with ASEAN

5 The Promises of the Single Currency Renew Momentum for Building Europe Spur Economic Growth Balance out the Dollar Hegemony

6 Optimal Currency Area Identify a contiguous set of countries for which adopting a single currency would allow Optimization of economic growth Minimization of the impact of asymmetric shocks Success requires three conditions Mobility of capital and labor Flexibility of salaries and prices Automatic mechanisms for fiscal transfers

7 Are/Were the European Union and ASEAN Optimum Currency Areas? Economic convergence Mobility of capital and labor Flexibility of salaries and prices Automatic mechanisms for fiscal transfers

8 The Euro-zone in 2005 & 2014 vs. Euro-skeptics: unemployment Denmark.5.2%...6.5% Sweden...5.3%...8.1% United Kingdom.4.9%...6.8% Euro-zone in %, in % Today 2014: Spain at 27% and Greece at 24%

9 The Euro is a Straight Jacket Single currency and monetary policy and European Central Bank but. Growth and Stabilization Pact Upper bound on National Debt (60%) Constraint on national budget deficit (3%)

10 Cracks in an Ill- Designed Structure Diverging rates of inflation amongst Eurozone members Diverging purchasing power amongst National Euros Differential Impact of asymmetric shocks such as imported inflation and oil price shocks

11 Overvaluation of National Euros % overvaluation between 01/99 and 01/05 & 01/99 and 01 /2013 vis a vis average Eurozone and Germany s Greece..25%...47% Ireland..16%...38% Portugal 14%...41%

12 Which Crisis? Fiscal/budgetary crisis Banking crisis Competitiveness crisis

13 The Way Forward Integration Fiscal Union Euro Zone Bonds Euro ( ) Banking Union Quantitative Easing - Muddling Through Austerity Internal Devaluation Partial Fragmentation Disintegration Greece or Spain exit Germany exit

14 Muddling through: too little too late! Voluntary restructuring for private bondholders of Greek debt: 50% haircut Banks recapitalization Austerity Plans European Stabilization Fund and European Financial Stability Facility increased to $1bn? ECB intervention (or threat of) in PIIGS s sovereign debt market

15 Can the Single Currency Pact be Reformed: the Path to a Fiscal Union? At the minimum loosen/abandon growth and stabilization pact Foster wage flexibility and labor mobility Harmonize electoral calendars Transfer 5-7% of fiscal expenditures to Brussels Amend Single Currency Act to allow possible exits

16 Greece exit the New law for currency denomination of liabilities Moratorium on capital flows Resurrect Drachma at D340 = 1 and let it float Adjustment period of months: inflation, economic growth, employment and B of P Argentina and GDP warrants

17 Lessons for ASEAN (1) Quest for ASEAN Monetary Union is a lofty but distant goal ASEAN is still at an early stage of economic integration Intermediate necessary (but not sufficient) steps towards Monetary Union Beware of the Monetary Union cum- Competitiveness conundrum

18 Lessons for ASEAN (2): the Asian Monetary Union path (1-8 years) Building the foundations by turning ASEAN into an Optimal Currency Area Asian Currency Unit (ACUs)to anchor ASEAN monetary system ASEAN bonds ACU-denominated sovereign and corporate bond issues ASEAN banking union. Harmonized implementation of Basel III and ASEAN deposit insurance scheme

19 Lessons for ASEAN (3): the Asian Monetary Union path (8-25 years) Is ASEAN ready for fiscal union? Is ASEAN ready for a single monetary policy and one ASEAN central bank? Is ASEAN ready for a single currency?

20 Lessons for ASEAN (3): the private sector path The false promise of Monetary Union Deepen Capital Account Convertibility Nurture liquidity of market for currency derivatives Deepen fixed income/bond markets.yield curve for better resource allocation Promote pension reform by transitioning from pay-as-you-go to market capitalization system