The Parallel Currency Approach to Asian Monetary Integration

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The Parallel Currency Approach to Asian Monetary Integration1
Barry Eichengreen
Since the crisis of 1997-8, there has been a proliferation of proposals for fostering
Asian monetary integration. Asian countries, it is suggested, should collectively peg their
currencies to the dollar, the yen, or a dollar-yen-euro basket or establish a multilateral
currency grid like the European Monetary System. The resulting exchange rate stability
would promote intra-regional trade, simplify investment planning, and encourage crossborder
participation in local bond markets. Experience with establishing and maintaining
a system of stable exchange rates would help to ready the region for the introduction of a
single currency. Asia, in this view, should emulate Europe’s approach to regional
monetary integration.
But, along with the attractions of the European example, there are also dangers.
Defending a system of currency pegs in the presence of high capital mobility requires the
close convergence of policies and the maintenance of confidence.2 If either precondition
is disturbed, a country will require extensive financial support in order to defend its peg
or to undertake an orderly realignment. In practice, Asian countries possess neither the
willingness to subordinate other policies to these imperatives nor the solidarity needed to
offer extensive financial supports.3 Absent an appetite for political integration, there is
little readiness to create a regional central bank like the European Central Bank, since
there is no counterpart to the European Parliament to hold it accountable for its actions.
Hence there is little prospect of early monetary union to tie down expectations. A system
of Asian currency pegs would consequently be fragile and crisis prone. As a road to
monetary unification it would be a dead end.
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Better would be for governments to create an Asian Currency Unit, or ACU,
constituted as a weighted average of Asian currencies, and allow... [continues]

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