Asean and the European Union have very different social and economic characteristics.
Based on GDP, the economic power of the EU is more than nine times that of Asean. The EU began its integration in 1958, long before the Bangkok Declaration of Asean in 1967. But despite the differences, the EU debt crisis may offer valuable lessons for Asean.
The euro-zone mess was triggered by a complex set of factors. Yet, although economists might argue over the real cause of the crisis, there are at least three interrelated factors that Asean can take lessons from.
First is the disparity in economic competitiveness of member countries. It creates trade imbalances. Strong economies, such as Germany, have exports whose value far exceeds their imports. At the same time, weak economies such as Portugal, Ireland, Italy, Greece and Spain (PIIGS) are in the opposite condition.
PIIGS exports have lost competitiveness in the global market, forcing them to rely more on borrowing to finance their trade deficits. The euro, as a single currency, exacerbates the situation since the PIIGS cannot independently devalue their currency to make their products cheaper.
Because of the persisting trade imbalances, weak countries have accumulated debts until reaching a point where they cannot pay anymore. This behaviour was driven by the fact that the incentive to borrow increased thanks to the decreasing interest rate after they joined the euro.
The second factor to learn from in the crisis is the lack of commitment from EU leaders. The 1992 Maastricht Treaty explicitly says that euro members must stick to a maximum 3 per cent of GDP in annual borrowing limits and 60 per cent debt-to-GDP ratio to ensure the stability of the euro-zone and prevent reckless fiscal behavior. Years later, everyone seems to have forgotten they ever had such limits.
Needless to say, Greece ignored this restriction, resulting in a budget deficit of 12 per cent of GDP and 160 per cent debt-to-GDP ratio. Critics have accused Greece of manipulating the Maastricht rule by using complex derivatives and financial engineering. But what bothers us are Germany and France, the two biggest countries in the euro zone. They also exceeded the rules, by creating budget deficits of 4 and 7 per cent, respectively, and debt-to-GDP ratios of 83 and 82 per cent. This leads us to the conclusion that EU leaders cannot maintain their own rules.
Last week, EU member countries signed a landmark fiscal-compact treaty to improve on previous agreements. It tightens the rules and grants the European Court of Justice the right to check whether countries are implementing budget limits properly, as well as creating an automatic mechanism to force countries to correct their budgets. It remains to be seen whether these new rules will be consistently and successfully implemented.
The third main cause of the EU’s malaise is the loss of confidence by its members. This factor is a common response to the previous factors. Markets have become anxious over whether the euro currency can survive and whether EU leaders are capable of containing the crisis. The interest-rate indicators show that euro-zone countries have reached the highest point since the inception of the single currency, meaning the public does not have much faith in the euro economy.
Concern that things are getting worse has loomed large since rating agencies responded to the crisis by reducing the credit ratings of several EU countries to below investment grade, or “junk” – although critics say the rating agencies have overreacted, since they did not give a proper warning before the crisis exploded.
Asean is the most integrated regional organisation in the developing world. The EU might not be the right role model for its economic development but, undeniably, the euro-zone crisis can give an insight on how economic integration should be handled with care.
The main important lesson for Asean is that every integration should start with efforts to reach the same economic development in each member state. It is important to avoid the economic imbalance that has afflicted the euro zone. If Asean wants to deepen its integration, it must ensure that all member states grow economically at a similar pace that leaves no country behind.
For now, economic imbalance among Asean member states may have little influence on the region’s development. Among Asean countries, trade with external partners is far more significant than intra-Asean trade, so member states seem more vulnerable to shock outside Asean rather than inside the region. But, in the future, this condition will evolve as Asean becomes more integrated.
Sustainable growth in a region can only be achieved if all member states are at a similar stage of development.
Learning from the EU debacle, Asean should also create a mechanism to ensure fast and proper response when a crisis occurs. Asean needs to build up credibility so that markets believe the grouping can handle a crisis well.
Resisting globalisation is as fruitless as defying the law of gravity. Economic integration is inevitable and trade agreements are necessary to make products competitive in the global market. But the more integrated a region is, the more vulnerable its countries are to each other’s internal problems. Thus Asean must step carefully on the road to full integration if the journey is to bring more good than harm. –Rudi Winandoko, The Jakarta Post
Rudi Winandoko is a diplomat at the Indonesian foreign ministry.
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