Proposals for an Asian Currency Unit drew strong support yesterday from economist and Barry Eichengreen, who argued that it could help to simplify commercial and financial transactions across the region. A currency unit could function as “fully legal tender” alongside existing Asian currencies until the region is ready for a single currency, he told Emerging Markets.
The idea of a currency union provoked strong controversy last year when it was first advanced by the Asian Development Bank, with some US Treasury officials seeing the proposed quasi currency as a “threat to the dollar.” Finance ministers in the ASEAN+3 group took the idea out of the hands of the ADB because of its “political” dimensions.
But Eichengreen, professor at the University of California, rejected the idea that the ACU was a “trojan horse” designed to achieve a common Asian currency by stealth. It would be a “parallel currency” alongside existing currencies, he argued at a World Bank seminar.
A basket of Asian currencies could float against each other within a currency union and it would provide a useful instrument in which to denominate regional trade and financial transactions, he said.
Japan’s vice finance minister for international affairs Hiroshi Watanabe countered that an ACU would not solve the problem with Asian currencies continuing to fluctuate against the dollar and against other outside currencies with which East Asia trades. “What we need is an anchor that does not fluctuate with outside currencies,” Watanabe insisted.
Asia may argue over whether or not it needs a common currency but the fact is that monetary union in Europe, culminating in the launch of the euro in 1999, provided a powerful spur to the integration of financial markets in Europe, EU commissioner for economic and monetary affairs Joaquin Almunia argued. This in turn has helped to boost economic prosperity within the European Union, he added.
Integration of financial systems within East Asia is essential if the region is to find better ways of recycling it huge foreign exchange reserves, suggested Bank Negara Malaysia governor Zeti Akhtar Aziz.
Bank of Thailand governor Pridiyathorn Devakula agreed. At present, East Asians invest only 5% of their total investment portfolio in each other’s countries, he noted. “There is a real need for the region to invest more in itself.”
Watanabe also noted that a large part of East Asia’s savings flow out of the region into “Wall Street and the City of London”, from where they are intermediated back into investment in Asia - with a “currency and time zone mismatch” in the process. This is because domestic financial markets, especially secondary trading markets, are not “deep” enough to meet the needs of savers and business, he suggested.
Effective financial markets, at the domestic and regional level, represent East Asia’s “missing link” said Pridiyathorn. The region needs to develop a proper infrastructure for payments and settlement of financial transactions, he suggested At present, settlement has to be done “outside the region.” A priority should be to establish “More active marketing for discounting Asian papers.”