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EMU seen as role model for Asia


PARIS -- The yen is crumbling. The conventional wisdom is that if it is to crash to YEN 160 against the US dollar, the Chinese yuan won't stand and the Hong Kong dollar peg will also go. If that happens, what will be the justifiable value of the baht, which is now fluctuating between Bt43-Bt44 to the US dollar?

A view from Europe is that wilting Asia is facing tough luck. There is no end in sight to the foreign exchange crisis. But the European experience in striving for a monetary union might be useful. Jean-Paul Fitoussi, a well-known French economist and head of a think-tank, believes that a single Europe will be better off after it formally adopts the euro at the beginning of 1999 for it will transform the region into a powerful economic continent.

More importantly, by transferring the monetary policy to the European central bank, European Union member countries will have less burden, at least on the monetary side, since with the adoption of the euro, they will not have to be in the business of defending their currencies like before, Fitoussi says. The European Union members then can focus more on managing their individual fiscal policy, which, however, will have to be kept within the broad criteria framework.

Finance Minister Tarrin Nimmanahaeminda is almost at his wit's end over the baht crisis. He has repeatedly come out to talk about stability, although the baht, floated on July 2 last year, has yet to find its equilibrium. The appropriate value of the baht, he says, is defined as a level that boosts the competitiveness of Thai exports and attracts foreign capital back to Thailand. ''Efforts to stabilise the baht mean that it should not be too strong nor too weak. If it's too strong, it will hurt exports. If it's too weak, it will affect interest rates and lead to capital outflow,'' he says.

Yet so far the baht, which managed to range between Bt38-Bt39/US dollar over the past two or three months before slipping back to Bt43 over the past two weeks, is holding some ground because of the high interest rate policy. The burden or the cost of the monetary policy is so enormous that it is swiftly killing the real sector or domestic businesses.

Economic growth has been revised to a negative 6 per cent as a result of the high cost of borrowings. Elsewhere in the region interest rates have also been kept sky-high to prevent the currencies from running away.

Even countries with sound macro-economic fundamentals -- like Singapore for instance -- are not immune to the external shocks. Fitoussi says the European monetary model might be suitable for an Asia looking for more currency stability. For individual small and vulnerable economies, maintaining a floating foreign exchange regime is no answer to achieving macro-economic stability because the movements in the globalisation of the financial markets, equally beneficial and destructive, are so unpredictable.

Fitoussi says looking into the future there will be very small room for mistakes a country can afford to make otherwise it stands to face a financial crisis.

While the European economies have reverted to a fixed exchange rate, the Asian economies have taken a leap of faith into the floated currency regime. Bank of America's latest research report (June 1998) on ''EMU: An Asian Perspective'' indicates that it may be worthwhile for the Asian economies to consider the European Monetary Union-type arrangement at some stage.

''This is so despite the disruption caused by the Asian forex crisis,'' the report says. ''Countries in question may include core Asean economies and those of Greater China -- the People's Republic of China, Taiwan and Hong Kong.

''It remains important to differentiate between the likelihood of significant divergences in the paths of some Asian economies following the forex crisis and their sound longer-term prospects.

''If anything, imposition of IMF programmes in three Asean economies, and the process of consolidation in the banking and financial sectors of Asian countries such as the People's Republic of China will benefit any future development towards increased monetary cooperation and coordination.''

In the meantime, Europe will be relatively immune to the Asia flu because of the fact that the region is largely driven by domestic-led growth. Fitoussi says there is a 2 per cent surplus in external trade of gross domestic product of Western European economies. This means that European companies won't over-burden themselves with debts for business expansion but will rely largely on their accumulated earnings. France, Germany and Italy are also expanding at 2 to 3 per cent in 1998 and 1999. Inflation is also low, 1 per cent in France and 1.4 per cent in 11 other European economies.

''During the past four years, the French business sector has enjoyed a net creditor position. This has enabled them to prosper. But it can also be explained by the sound monetary policy in the past,'' Fitoussi says.




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