Although five major central banks have recently agreed to provide dollars for the European banking system in an effort to avert a funding crisis, the southern European countries are still not immune from a possible financial crisis that could send a tidal wave across the entire continent.
The European Union is still facing the possibility of a debt crisis that could have a global impact if European governments are unable to resolve the problem which started in Greece. The European Central Bank recently announced that it would coordinate efforts with the U.S. Federal Reserve, the Bank of England, Bank of Japan and the Swiss National Bank, to conduct three U.S. dollar liquidity-providing operations with a maturity of approximately three months covering to the end of the year. But the euro debt crisis is far from over. Some 17 countries that use the euro are still divided on whether they can actually save Greece, which has been relying on emergency loans from other eurozone countries and the International Monetary Fund since last year.
For countries in this region, the Greek crisis reveals challenges about regional integration. The question that countries, aspiring to follow the European integration model, now have to ponder is whether the one-size-fits-all currency is such a good idea.
The chronic debt crisis in Europe has been difficult to tackle because one member country would not be able to spend freely or use monetary means to improve their competitiveness because the euro countries had already given up certain sovereignty in monetary and fiscal policy as an exchange to become part of the eurozone.
In comparison, Thailand was able to recover from the financial crisis in 1997 partly because Thailand could boost its exports after a sharp depreciation of the baht after Thailand shifted from a fixed exchange rate to a floating rate regime shortly after the crisis.
However, Greece could not devalue its currency to boost its export competitiveness because this southern European country “gave up” its national currency for the euro in 2001. Greece could not freely run a huge deficit to boost domestic consumption, like the U.S. has been trying to do, either. Greece was supposed to comply with the EU rule, which requires that member state’s deficit not to exceed 3 percent of gross domestic product. In short, Greece does not have much room to manoeuver because the country has given up monetary and fiscal sovereignty in exchange for adopting the euro currency.
Europe’s debt crisis also shows how countries in the same regional group have been intertwined. Greek crisis could be contagious and it could shake confidence across the continent. The European banking system is facing a crisis ― an acute shortage of dollars out of concerns that the European banking system is overexposed to the region’s government debt crisis.
ASEAN, meanwhile, has been inspired by the EU model. The region does not have a plan to introduce a single currency but it has financial cooperation through the Chiang Mai Initiative which is a multilateral currency swap arrangement to help members which face a short-term liquidity problem. Regional cooperation such as this has drawn the countries closer. And a financial problem in one small country can also affect its neighbors, even though the scale may not be as massive as in Europe.
ASEAN countries are set to join the ASEAN Economic Community in 2015, which marks a milestone of cooperation after the inception of the ASEAN Free Trade Area in 1992. While regional integration is desirable, countries should proceed carefully to ensure that every member is ready to join the club. After all, ASEAN, like the EU, also consists of members with different levels of economic development.
