Oct 17, 2012

Thailand - EU fallout offers Asean hard lesson

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Policymakers in the 10-member Association of Southeast Asian Nations (Asean) observe the evolving euro zone crisis with a mixture of nervousness and distance.

At home, policymakers, businessmen and academia are excited with the opportunities economic integration would bring to their pact. But one must, cautiously, learn from the doldrums of Europe's real life example.

If EU leaders mismanage the euro crisis, its contagion could spread globally and impact on Asean economies. For the moment, it is forcing a rethink among Asean members about the nature of the objectives of regional economic integration, the impact of policy response and the working mechanism of the pact.

For the EU, the 1992 Maastricht Treaty set out the criteria for EU monetary union. The purpose was to converge the economies of prospective single currency member states. The conditions stipulated that government deficits could not exceed 3% of GDP and that government debts should not exceed 60% of GDP.

By 1997, all the euro candidate states had flouted the criteria set out in Maastricht. France and Germany used creative accounting to reassign taxes and privatisation revenues in order to make government deficits appear lower. Government accounts in Italy and Greece bore little relation to reality. By 2010, when the euro crisis broke, euro zone member states had a gross debt of 86% GDP and an average government deficit of 6% GDP. For Italy, Greece and Ireland, government debt was a whopping 119%, 142% and 96% of GDP respectively.

The profound differences between the euro member states' economies had not converged by the time of the euro's launch in 1999. At this stage, the euro project shifted from an economic issue into a step towards European political integration. The lack of control mechanisms exercised by the Euro members at the beginning proved fatal to the stability of the pack. Obviously, countries that lack fiscal and monetary discipline, as can be seen, in problematic countries namely PIGS (Portugal, Ireland, Greece and Spain) will have spill-over effects on the health of connected economies.

Historians are not surprised. The EU has always been about political unity. It began as a way to halt war between European states. Its hallmark is a pooling of sovereignty to create supranational institutions. European political classes view closer political integration as the solution to all problems, including economic ones.

But there was no central control over what became a stateless currency. The European Central Bank only had a remit to control inflation. Euro states pursued their own fiscal policies.

Effective exchange rates in the stronger euro economies, such as Germany and the Netherlands, fell and encouraged exports. Germany gained the most as its economy had been the subject of stringent austerity measures over the previous decade _ higher taxes and cuts in state benefits _ to compensate for the cost of unification with the former East Germany in 1990.

The weaker euro economies experienced a phantom boom with lower interest rates, an influx of foreign exchange in their capital markets, import growth, real estate asset booms, and export stagnation. Public and private sector debt escalated until the bubble burst in 2010. The March 2012 Fiscal Compact, a treaty signed by 25 of the EU's 27 members to address the euro crisis, was the first move towards a fiscal union and central control over the euro.

This is a model Asean countries cannot follow. Asean, like the EU, began as a political project. Its five founding members, Indonesia, Malaysia, the Philippines, Singapore, and Thailand, joined together out of fear of Communism. In contrast to the EU founding members who are former colonial powers or strong states, Asean members are nearly all former colonies that share a legacy of regional conflicts, border disputes and ethnic and racial tensions.

Asean member states include democracies, monarchies, quasi military dictatorships, and communist states. The organisation's central tenet is that members do not interfere in each other's internal affairs. EU member states share a largely similar culture and history. But political, economic, cultural, historical and ideological differences among Asean members are too vast to consider political and economic integration.

While its citizens are becoming more aware of Asean, the private sector in each country is planning its trade and investment strategies in a larger territory, and the public sector is setting up the framework for the free flow of goods, services, funds and labour, it is unquestionably plausible for Asean to fall into the same trap as the EU.

Problems that may occur include the inability to monitor how disciplined each member is, a lack of assumed political leadership, economic and social imbalances, the list goes on.

Amid the euro crisis, integration remains a mere talking point while a single Asean currency is not a realistic option. Nonetheless, there are countless loose ends needed to be tied. Policymakers in the state of Asean must keep in mind that designing economic integration is one thing, maintaining it is another. Europe is bitter real life example for Asean.

Pita Limjaroenrat

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