In March 2012 the Greek crisis led to a 50 per cent ‘haircut’ on its debt owned by Eurozone countries. Since then the country has oscillated back and forth between crisis and glimmers of hope. As recently as 2014, Greece appeared to be emerging from the crisis, but its fortunes deteriorated rapidly in 2015. Serious fears of an exit from the Eurozone subsided only in August 2015 with the Greek parliament’s approval of a third bailout package. With a new government sworn in after elections in September, the markets have calmed, at least for the moment. The future remains uncertain.
The Greek experience has rattled the confidence of European integration planners, dampened the enthusiasm of protagonists of the ‘ever-deeper union’, and fanned the flames of an anti-EU backlash — particularly on the extreme ends of the political spectrum but now also in the mainstream of EU politics. How could such a small country — constituting only 1 per cent and 2 per cent of regional GDP and population respectively — create such a negative turn of events for what seemed only a decade ago to be the unstoppable train of European integration?
The answer to this question holds important lessons for the AEC, which is slated to be completed by the end of 2015. The AEC is arguably the most ambitious economic integration program in the developing world. Greece may be a small country far away from ASEAN, but it does offer important lessons regarding the need to be cautious in pursuing deeper monetary integration in a post-AEC world.
It is essential to distinguish between promoting economic integration of the real sector (that is, goods and services) and monetary integration. The EU Single Market Program (SMP) — based on the ‘four freedoms’ (goods, services, labour and capital) — has generally been a great success, adding an increase in EU per capital income (relative to the baseline) of 2–3 percent of GDP by one estimate.
The AEC in part emulates the SMP. The AEC is a ‘stylised’ common market, committing the region to a free flow of goods, services, foreign direct investment and skilled labour. Unskilled labour was always a non-starter given the diversity of the region. The same is true of capital: in the wake of the 1997–98 Asian financial crisis, the right for an ASEAN member-country to regulate financial flows has become sacrosanct. Greece had open capital markets even before it joined the euro in 1998. As AEC focuses on the real sector, risks of a Greek-style meltdown are minimal.
Still the Greek case stands as a warning. In setting a post-AEC agenda, the ASEAN leaders would do well to eschew closer monetary integration and proceed slowly in terms of financial integration, at least in the medium term. In 1999, the then Philippine president Joseph Estrada, impressed by the success of the euro, proposed that ASEAN consider a common currency. Fortunately, that idea never took root.
The economic logic behind real and monetary integration differs considerably: the case for free trade is strong but that of financial integration is much less clear, particularly since capital inflows bring with them negative externalities that do not exist with trade. For example, Greece’s strong economic growth, especially after the introduction of the euro, was fuelled in part by cheap capital. Greece was able to tap into this capital due to the credibility created by the currency union and by importing German credibility.
This led to large trade deficits in Greece and an exposure to global financial markets that ended up being its undoing. Capital inflows grow over time, but they can leave in the blink of an eye — something that Asia also experienced during the 1997–98 crisis. When this happened to Greece, it suffered both a financial crisis and a structural crisis, as a factor of production on which it had grown to depend suddenly became scarce.
Even so, closer monetary and financial cooperation makes a great deal of sense. As Southeast Asia becomes more integrated, markets will increasingly see it as a common economic space: a crisis in one country will lead to a crisis in another. This externality can be internalised through greater macroeconomic dialogue, data sharing and common approaches to risk management.
There are already plenty of institutions in place to help do this at the ASEAN and Asian levels, including the ASEAN Finance Ministers Meeting, ASEAN+3 Finance Ministers Meeting, the Southeast Asian Central Banks initiative, Executives’ Meetings of East Asian Central Banks, ASEAN Central Bank Governors Meeting and the ASEAN+3 Macroeconomic Research Office. Risk pooling via an expansion of the Chiang Mai Initiative Multilateralization can also help promote regional stability.
ASEAN must avoid the mistake of deepening integration for its own sake. Until now, the region has looked to the European experience for ideas, but it has always been careful to filter it through an ASEAN lens. This has been highly effective. Indeed, ASEAN economic cooperation has a good deal to teach Europe in terms of focusing on ‘best practices’ rather than just national treatment and emphasising ‘open regionalism’ rather than just ‘intra-regionalism’. It would be a grave mistake for ASEAN to follow the European example in the monetary realm before its time.
Michael G. Plummer is director of the School of Advanced International Studies (SAIS), Europe and Eni Professor of International Economics at The Johns Hopkins University.