Fallacies about Asian monetary union persist

Thanks in part to ADB research.

The Asian Development Bank plays a useful role not only as an investment banking client but as an investor and a source of research. But like all institutions it is best at finding arguments to justify its existence. Chasing the spectre of Asian monetary union is one of them.

The idea of monetary cooperation has arisen from time to time, most visibly with the Japanese idea of an Asian Monetary Fund in the wake of the regional financial crisis in 1997 - one that was quickly squashed by the US Treasury Department. Since then, however, I have had the occasional conversation with market players and regulators when the idea came up, usually just as speculation.

Now the ADB has released a paper, "Prospects for Asian monetary cooperation after the Asian financial crisis: pipedream or possible reality?" by Peter Wilson, an economist at the National University of Singapore.

I can tell you the answer in one word: pipedream.

This is not due to any technical inability of Asian governments, or any lack of expertise. It's not because the region's economies are too different, or have variable currency arrangements, or any lack of funds. True, the paper dwells on these technical arguments, but I don't need to repeat them. They are irrelevant.

Asian monetary cooperation is not about economics or finance. It is 100% political. And so has been monetary cooperation in Europe, the only meaningful benchmark for this topic.

My own chats with market players in the region suggests that technocrats in Asia overemphasize the role economics and markets played in the making of the EU, and discount the political question.

Looking at the history of the European Union, it becomes evident that even basic steps toward monetary cooperation in Asia are not going to take place under current political circumstances.

The EU was born from the bloodshed of World War II and the failure of the nation-state system. Since then, the public face of "Europe" has been dominated by the federalist vision of Jean Monnet and Robert Schuman, considered the architects of the present-day EU. Monnet in particular strongly believed in a supranational authority that would bind France and Germany together and create a unified Europe where war would become impossible.

The more recent image of Europe derives from former European Commission president Jacque Delor's 1986 white paper that established a free market in goods, services and labour throughout the member countries. So today the EU is seen by most Asian policymakers only as an economic body.

In reality the building of the EU has from the start been an exercise in the preservation and buttressing of the nation-state. It was made possible only by the post-war Franco-German partnership, which broadly meant German money in return for a gradual rebuilding of trust.

The earliest incarnation of the EU demonstrates its political nature. In 1948, three years after the war's close, Britain and the United States planned to end their military occupation of Germany's Ruhr valley, which lies adjacent to France and the Low Countries, and was Europe's primary source of coal and steel - the necessary ingredients to manufacturing armaments. Monnet, an economic plan administrator for the French government and something of a dreamer, proposed an independent, supranational body to manage the Ruhr.

The practical work was achieved by Robert Schuman, the French finance minister, and Conrad Adenauer, the visionary leader of the new Republic of Germany (West Germany), and with significant backing by the United States, which was keen to see a return to European prosperity.

In 1951 the European Coal and Steel Commission was born, the precursor to the EU, to regulate these industries, with Italy and the three Benelux countries also taking part.

This was a purely political achievement designed to ensure Germany could not rearm, and it was struck to the surprise of many (especially the French) because Adenauer realized Germany must give up a degree of sovereignty over its resources in order to become a 'normal' country again. Although Monnet supplied the idea, the reality had nothing to do with federalist dreams.

Nor can the pooling of sovereignty be appreciated without mentioning the birth of the Cold War against Stalin at a time when communist parties were at the peak of power in Western European states. Anti-communists such as Adenauer and Schuman, aided by the US, realized that getting the German economic driver started was critical to prosperity and stability in Europe. The only way to assuage other nations' concerns about rebuilding German manufacturing was to embed its political decision-making capability in a European structure. Non-federalist NATO was the military adjunct to this process (said to keep the Russians out, the Americans in and the Germans down).

I go into this history because today's EU - the dynamic market of 320 million people now represented by a single currency - looks mostly like an economic arrangement. Debates over finance, pensions, markets and trade dominate its discussions, both internally and to the outside world. But none of these amazing achievements by Europe would have occurred without the desire among post-war European governments to put the horror of two world wars and the Holocaust behind them, and rebuild a partnership based on mutual respect.

Asian governments can negotiate free trade pacts and other agreements. But monetary cooperation, except on a specific bilateral basis, is a non-starter without the underlying political commitment.

Sharing even a limited amount of sovereignty seems to occur only when the nation-state has no alternative. It is an extreme mechanism for survival. Asia lacks the will or, indeed, the need to go down this road.

Moreover, Japan never had an Adenauer and its society never really departed from its pre-war nature. Germany really did change, and through the ECSC it demonstrated its commitment to a different future.

I can envisage some kind of monetary cooperation in Asia that is based on future Chinese dominance, when the United States has ceased to be the dominant balancing force in the region. But this is more akin to a renminbi bloc. I don't see anything evolving like the ECSC, let alone the EU.

The ADB talks about a "good case for placing responsibility for the functions of macroeconomic surveillance and regional resource pooling within a permanent institution which could evolve over time into a fully fledged Asian Monetary Fund".

The ADB and regional central banks have been talking about a market 'early warning' system since 1997 and they still haven't put anything in place. I doubt this is still seen as a pressing matter - certainly not pressing enough to justify the surrender of even limited sovereignty.

Whatever limited monetary cooperative measures Asian governments do assemble is likely to be as vulnerable to collapse as Europe's 'snake-and-tunnel' currency arrangement in the 1970s or ERM in the 1980s.

Not because Asian governments can't do it; because they won't want to. Asia never had the kind of opportunity to reconcile that Europe had, for many reasons, and without another shock akin to a world war, Asian monetary cooperation will remain a pipedream. This should be recognized as a good thing; who wants to suffer like that again? The ADB would no doubt love to expand its role in the emergence of such institutions, but it should save its resources for other, more useful kinds of research.