February 7th, 2013 by Hafiz Noor Shams
I am a supporter of regionalism. Despite whatever jokes I may have about the euro, I do not want to see its disintegration.
While I have refined my opinion by stressing on the importance of having similar economies coming into a union instead of having a disparate set of economies with wildly different setups and cycles coming together, I do still pretty much in favor of monetary union. I may be in the minority now but I do advocate a single currency for Southeast Asia. Not for all countries in the region but maybe just between Malaysia, Singapore and Brunei. These countries were in a union before while Singapore and Brunei are effectively already in a currency union. Furthermore, Malaysian and Singaporean economies are similar in many ways – both are trade-dependent though more so for Singapore. A combination of Indochinese countries can form another separate union. So, I envision at least two monetary unions within Asean (or three with Indonesia and Timor Leste together).
I am still amazed by the fact my trade professor at Michigan showed me. During one winter morning, he showed that trade between New York and Seattle was many times higher than between Seattle and Vancouver, despite the fact that Seattle is much closer to Vancouver than New York. “It appears Canada is located on the moon!” he stressed.
He was demonstrating that monetary union increased trade. As a strong believer of the net benefit of free trade, I was hooked by it. Even now.
And Europe has benefited from its monetary union, even as it is hobbled by troubles right now.
One painful but the obvious solution to the ongoing European problem is for countries in economic recession, indeed, depression, to leave the Eurozone and devalue their currencies. That would have happened in a typical country during a recession. Currency devaluation helps a country regains its competitiveness by making its exports cheaper to the rest of the world. That what happened in Malaysia in the periods after the worst recession the country has ever experienced yet. That was what happened in Asia. It was an export-driven recovery.
For the 17 members of the Eurozone, devaluation is not an option if the integrity of the euro is cherished.
There are alternatives to exit from the Eurozone.
The first was internal devaluation. This pretty much refers to austerity measures. Wages are cut down to make a crisis country more competitive, among others. This a painful because while it does aid competitiveness, it does create a downward spiral that is associated with deflation. People will not spend before they expect prices tomorrow will be cheaper than today. People will not spend because they have less money. While real prices will adjust in the long run, the short term can be really painful.
There is an interesting article on Bloomberg today about fiscal devaluation as proposed by economist Gita Gopinath (of Harvard “Call Me Maybe” recruitment video fame, anybody?). It tries to mimic the effect of currency devaluation, which makes it very appealing. It includes a hike in value-added tax along with the provision of tax credit. The arrangement discourages imports and support exports. The VAT is imposed on all domestically consumed or used goods but the tax credits are granted to all domestic producers that eliminate the effect of VAT. Exporters benefit from this setup. Importers suffer. The great part is that it is no clear link to price deflation, which makes this arrangement usable in time of recession.
That however does raise the alarm of protectionism. In times like this in Europe, it is tolerable. In normal times, this can be a barrier to free trade. It can give unfair advantages to the home countries that may later mimic the ugliness of currency wars.
Gopinath, 41, a professor at Harvard University in Cambridge, Massachusetts, has pushed for tax intervention as a way forward for euro-area countries that cannot devalue their exchange rates. “Fiscal devaluation” is helping France turn the corner during a period of extreme budget constraints, former Airbus SAS chief Louis Gallois said in a business- competitiveness report Hollande commissioned. [Rina Chandran. Harvard’s Gopinath Helps France Beat Euro Straitjacket. Bloomberg. February 7 2013]