Impact Of The Asian Currency Unit (Acu) On The East Asian Economies: Lessons From The European Monetary Unit (Emu).

1. Abstract:

There has been a great deal of interest in the formation of a currency union in Asia since the countries of the European Union (EU) decided to introduce a single currency for Europe. Most of the studies have been to identify the relationships between the existing economic integrations as NAFTA and EU and the ASEAN.

The objective of this paper is to summarize proposed future evolution of Asian currency arrangements and examine it theoretically and empirically from a broad perspective. I believe that this kind of study will be indispensable for enhancing current discussions.

The paper compares the following countries for correlation among the countries for GDP, International and intra-regional trade, BOP as % of GDP, and Reserve accumulation for the time-period from 1989-2006.

1. Indonesia

2. Malaysia

3. Singapore

4. Thailand

5. Japan

6. Philippines

Finally to compare the learning from the EMU we would revisit the formulation of the EU and compare our findings with the ASEAN, also to suggest the role of Japan similar to the role of Germany in the formulation of EU, due to various reasons discussed further.

Table of contents Page no.

1. Abstract............................................. 1

2. Introduction..........................................3

3. East Asia-EU comparison........................4

4. Lessons from EU integration.....................5

5. East Asia-time to integrate economically.......6

I. Empirical findings......................7

II. Role of Japan...........................9

6. Impact of Institutionalization....................9

7. Obstacles............................................10

8. Limitation of the Study...........................11

9. Conclusion...........................................12

10. Appendix

11. Bibliography

2. Introduction:

Enlargement, economic and political integration are distinctive features of the global political and economic scene in the world as we see today. This paper aims to examine some factors relating to the feasibility of the formation of a currency union encompassing six Asian countries--Indonesia, Malaysia, Philippines, Singapore, Thailand, and Japan. Japan being economically stable and robust country can lead the others in forming the currency union.

A currency union is usually defined as an area throughout which a single currency circulates.

The creation of the free trade area in ASEAN could help set the stage for the creation of a currency union among the member countries, which would further enhance the regional economies. This is because a currency union eliminates exchange rate fluctuations among the countries involved and the transaction costs associated with them. This tends to promote increased trade and investment among the countries in the union. In fact, one of the main aims of the introduction of the euro was to enhance the gains from the creation of a single European market (Emerson et al. 1992). Another benefit of currency unions suggested by Agйnor (1994) and Giavazzi and Pagano (1988) is that they can enhance an inflation-prone country's credibility in fighting inflation9.

Methodologically this paper is structured as follows.

First, I first survey past studies intensively, rather than add new evidences, on issues already discussed, intending to gain robust conclusions.

Second, I revisit the experience with the European Currency Unit (ECU) as a "natural experiment" for analyzing the practicality of an ACU. This will help in identifying missing but important points in the current ACU-related discussion.

What follows are the main conclusions of this paper:

1) Europe has some but profound differences with the ASEAN nations in terms of objective and member nations roles, therefore EU can't be fully modeled for ACU.

2) The core group of nations should go ahead with the monetary unification as an example for other Asian nations which might follow soon.

3) Japan as is recovering now and is stable should lead the Asian pack as was done by Germany for the EU.

3. East Asia-EU comparison:

Whereas the European Union (EU) is fully integrated, Asia on the other hand still lags behind with regard to economic and political integration. EU-style political integration processes will not take place in East and Southeast Asia any time soon and Asian governments will continue to favor bilateral over multilateral trade free trade agreements for the foreseeable future. Compared to Europe, the Asian institutionalization process is usually referred to as "nascent" and the "principle of non-interference in internal affairs" (formulated in the charter of the Association of Southeast Asian Nations (ASEAN)) will remain an obstacle to further economic and political integration in Asia23. Another similar view supporting the above discussion is that in contrast to the European Union, ASEAN is a federation of nations with limited objectives. Its objectives are purely inter-governmental work methods. There are no community elements vis-Ðo-vis community institutions. ASEAN is a loose association of nations whereas EU is a firmly established community. The implications during the formulation of the EU were far more irreversible than the ASEAN.

Therefore, ASEAN acts without a joint parliamentary representation and without a community executive body.

(For further comparison of the ASEAN timeline with the European timeline of economic integration see: (Appendix