Transcript Slide 1

A SINGLE CURRENCY FOR THE GREATER
CHINESE ECONOMIC AREA
─The EU Paradiam Reconsidered─
presented by
Dr. Cherng-Shin Ouyang
Research Fellow
[email protected]
Chung-Hua Institution for Economic Research
75, Chang-Hsin St.,Taipei, Taiwan
Conference on The Economic and Security Situation after Taiwan’s Elections
23 September 2008
Organized by the Centre of East Asia Study,
Institute of Political Studies, Polish Academy of Sciences,
in collaboration with Warsaw School of Economics and the Taipei Economic
and Cultural Office in Poland
Sponsored by Taipei Economic and Cultural Office in Poland,
and the National Sciences Council (ROC-Taiwan)
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Glossary
AFC
Asian Financial Crisis
EEC
European Economic Community
AMF
Asian Monetary Fund
EMCF
European Monetary Cooperation Fund
AMO
Asian Monetary Organization
EMS
European Monetary System
ASEAN
Association of South East Asia Nations
EMU
European Monetary Union
CAD
Currency Areas Delimiting/demarcation
ERM
Exchange Rate Mechanism
CBC
Central Bank of China
ESCB
European System of Central Bank
CBS
Currency Board System
EU
European Union
CCA
Common Currency Area
GCC
Gulf Cooperation Council
CCBGs
Committee of Central Bank Governors
GCEA
Greater Chinese Economic Area
CECA
Closer Economic Cooperation Arrangement
HKMA
Hong Kong Monetary Authority
CEPA
Closer Economic Partnership Arrangement
IMF
International Monetary Fund
DPP
Democratic Progressive Party
KMT
Koumingtan
EAMA
East Asian Monetary Authority
MERCOSUR
Mercado común del Sur
ECB
European Central Bank
MNCs
Multinational Companies
ECSC
European Coal and Steel Community
NAFTA
North America Free Trade Agreement
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Glossary
NIEs
Newly-Industrializing Economies
NT$
New Taiwan Dollars
OCA
Optimum Currency Area
OPEC
Organization of Petroleum
Exporting Countries
PRC
People’s Republic of China
RMB
renminbi
SAR
Special Administration Region
SCA
Single Currency Agenda
SEZs
Special Economic Zones
WTO
World Trade Organization
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Contents
1- Introduction
2- The EU Paradigm in Perspective
2.1 A Brief History of EMU
2.2 Implications of the EMU
2.3 Future Prospect
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Contents
3- Single Currency in East Asia or GCEA?
3.1 ASEAN-Plus
3.1.1 Monetary Cooperation :Phase 1
3.1.2 Monetary Cooperation: Phase 2
3.2 The Greater Chinese Economic Area
3.2.1 Axis-1 (China-Taiwan): Partly Suffocated
3.2.2 Axis-2 (Hong Kong-China): Vibrant As Ever
3.2.3 Axis-3 (Taiwan-Hong Kong): Unequal Dependence
3.3 ASEAN-Plus and GCEA: A Preliminary Comparison
3.4 Rebuilding Axis-1
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Contents
4- Scope for Trans-Adaptation of EMU
4.1 The Tyranny of the Petrodollar Standard
4.1.1 Two Forms of Transfer
4.1.2 Hedging for Profit or Risk Management?
4.1.3 The Petrodollar Standard
4.2 Divorcing from the Dollar World
4.2.1 Consensus Building
4.2.2 Slow or Fast Track?
4.2.3 Monetary Union Depend on Pay-Offs Simulations
4.3. Objective Convergence Criteria versus Political Economy
4.3.1 Similarity and Differences
4.3.2 Irrelevance of the EU Paradigm
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Contents
5- The Way Ahead
5.1 EU Paradigm Modified
5.2 Trouble-Maker: The US Ultra-Liberalism
5.3 CAD Prior to OCA in System Switch
5.4 Final Remarks
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Fig.1 Currency Areas in terms of Foreign Assets Holding
EMU
￥
GCEA
SF
￡
Dollar World
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Proposed Currency Areas
Western Africa
underdeveloped infrastructure
MERCOSUR
closed economy, high volatility in capital
flows, interest conflict over dollarization
Gulf Cooperation
Council
Huge difference in country size and
disagreement on the location of central bank
NAFTA
US insistence on a dominant role for the
federal reserve system and US$ and
Canada’s uneven economic geography
ASEAN+3
(East Asia Minor)
Adherence to the non-interference principle
on domestic affairs, disagreement on the
composition of a currency basket
GCEA
Political hindrance (Taiwan)
One China, two systems (Hong Kong)
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Footprint of Euro
•ECSC (1951)
•EU (1993)
•EEC (1957)
•The Stability and Growth Pact
(1997)
•EC (1967)
•EMS (1979)
•EMU (1999)： 11 Member
Eurozone, Dual Circulation
•Whitle Paper on Completion of
the Internal Market (1985)
•EMU (2002)： Single Currency
•Single Market Act (1991)
•Treaty of Maastricht (1991)
•ECU (1992)
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•25 Member EU (2004)
•13 Member Eurozone (2007)
•15 Member Eurozone (2008)
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Characteristics of the EMU
 Broad-based experiment ever attempted through peaceful
means
 Triggered by strong program architects and governmental
commitment
 Carefully planned and forcefully implemented
 Developed from grass-root, expanded through consensus
building
 Increasing ECB’s influence in world trade and finance
 Global turmoil-weathering power rises in commensurate with the
EU aspiration to forward-looking perspective
 Growth of the euro-zone as a more cohesive shock absorber
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Characteristics of the EMU
 Sustained by drive towards continuous deepening and
widening
 The theory of the “optimal currency area” corroborated
(Mundel/McKinnon)
 Closely following the five-stages thesis for integration
(Balassa)
 Gradualism prevailed
 Visible hands play a large part
 Ad hoc policies become endogenous not exogenous
variables throughout the integration process
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Future Prospect
 EU integration breaks record on many fronts
 A monument or living paradigm！
 enlarged EU proper converted gradually into a more
homogeneous and consolidated entity
 Post-911 dollar started its landslide as never before; traders
dump the US dollar and dollar-denominated assets round the
world, more so after spiraling oil price (2003)
 GDP of Eurozone (EU15)surpassed the US in 2007
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Future Prospect
 EU status would not have taken place without EMU: magic of
the single currency agenda!
 €，An increasingly powerful reserve currency of the world
 The most fundamental change to the international monetary
system since the collapse of the Breton Woods system
 Might rival dollar as the world's paramount international reserve
currency, heyday of dollar hegemony is foredoomed
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Single Currency in East Asia or GCEA?
 ASEAN-Plus（GI）has received more attention whereas
GCEA （ GII ）conspicuous less
 Level of market integration, ethnic-cultural homogeneity,
geographical proximity, common heritage, GII substantially
higher than that of GI
 Institutional framework for cooperation and goal-setting, GI on
a higher level
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Monetary Cooperation of ASEAN-Plus: Phase 1
 Creating an internal market: Reacting against regional
protectionism posed by EU and NAFTA in 1990s
 Reinforced at the Asian financial crisis (APC): to create the
AMF
 Taiwan: access to multilateral groupings restricted to
sovereign states
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Monetary Cooperation of ASEAN-Plus: Phase 2
 “Chiang Mai Initiative” reached by ASEAN +3 for maintaining
exchange rates stability (2000), FTA concluded alternatively
between ASEAN and China (2002), Japan (2003) and South
Korea (2006), each on a different basis
 Signing of the ASEAN Constitution and the Economic Blueprint
at the 13th ASEAN summit (2007)
 China prioritized by ASEAN as the contracting partner for FTA
 Building the institutional capacity to coordinate financial and
monetary policies and to facilitate disclosure of information
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The Greater Chinese Economic Area
Axis-1 (China-Taiwan)： Partly Suffocated
Taiwan
Mandatory regime on bilateral relations undergoes
constant modifications
KMT sought to resume talks with Beijing, failed due
to top-down repetitive sabotages: 1990s
De-sinocization mobilized by pan-Green separatists:
2000s~
China
Adopts an open-door policy towards Taiwan and the
world without discrimination
Main Features
Asymmetric integration and dependence: trade,
investment, financial linkages
Decade-spanning stagnation in development of
bilateral ties entailing nothing but stalemate
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The Greater Chinese Economic Area
Axis-2 (Hong Kong-China): Vibrant As Ever
Hong Kong
A cosmopolitan trans-shipment hub
Regional headquarters of the MNCs
Survive the AFC upon first aid from Beijing
Currency Board System (CBS) introduced in 1983
 Largest direct investor in China
Bilateral Ties:
FTA Plus
CEPA-1(2004)
CEPA-2 (2005)
CEPA-3 (2007)
Main features
Restructured and assimilated into the Zhu-river
delta in southern China
Single currency agenda contradicts the “one
country two systems” dictum
HKMA satisfied with the CBS
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Monetary Cooperation of ASEAN-Plus: Phase 2
Axis-3 (Taiwan-Hong Kong): Unequal Dependence
“Taiwan-Hong Kong” interdependence devoid of less man-made
obstacles
Taiwan depends more on Hong Kong than the other way round
Hong Kong exploit as much arbitration charges as the extra
transaction costs incurred on Taiwan by having to do business with
mainland China indirectly
The scope for bilateral convergence in monetary system
considerably less than Axis-1 and Axis-2
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GI and GII: A Preliminary Comparison
 Formal integration in GI much higher than GII for the time being,
in real terms GI lags substantially behind especially when
contrasted against Axis-2
 To close the gap: Axis-1has to be rehabilitated
 Evidences: GII is more or less a homogeneous entity
 Much less coordinating efforts are required in redressing intraregion differences along Axis-1 and Axis-2
 Disparities in income and development levels are reducing
rapidly
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Rebuilding Axis-1
 Post-election easing of age-old cross-Strait tensions
 Taipei has taken the initiative for reapprochment
 The rationales: to recoup the incalculable economic losses
arising from the “suicidal” mainland China policies in the past
 The new orthodox: reversing the past wrong-doings in a spirit of
calculated and outgoing pragmatism
 CEPA-like FTA to be negotiated with Beijing considered a
priority
 SCA cannot be excluded in the medium run as long as both the
objective and subjective conditions are met
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Scope for Trans-Adaptation of EMU
 Motives for monetary union: (1) guard against the threat of
financial crisis, (2) to enhance total welfare of the region
concerned
 The aborted East Asian model is reflective of the first and relatively
modest objective
 The EU model shows more characteristics of the second
 For GCEA: ongoing crisis (a system- or mega-crisis) is of an
utterly different specie
 Those that have been taken hostage within reach of the crisischain start to look for emergence exit
 EU, sheltered by a dense wall of euro-dominated internal market
exhibits greater resilience
 The critical questions: how are we to characterize the current crisis?
 Secondly, what is the scope for trans-adaptation of the EU
paradigm to the GCEA?
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Tyranny of the Petrodollar Standard
 Current crisis: categorically diverse in origin and manifestation
 Crisis syndrome: plummeting US dollar, oil crisis, sub-prime
mortgages, food shortages, inflation, climate changes, etc.
 Causally related and in one way or the other
 Against which conventional wisdom is powerless to diagnose or to
rescue: APC pales by comparison
 Has little to do with trade cycle nor that of speculative attacks on
particular victims
 But one of irremediable sclerosis that derives overwhelmingly
from the intrinsic weakness of human brain in system design and
maintenance (US ultra-liberalism)
 In the monetary-financial sphere there is singularly one origin-the
US economy, principally the discredited dollar standard
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Forms of Wealth Transfer
 Dollar tyranny delivers shock waves across the globe amounting to
imposition of compulsory tax on ROW
 Causes: the 911 attack, deteriorating US economic fundamentals,
credibility deficit of Bush administration
 Out of benign or vicious neglect: the Fed/US Treasury choose to do
nothing！
 Burden sharing and diversification, dollar weakness entails
enormous wealth transfer in two parts: stock and flow/visible and
invisible
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Forms of Wealth Transfer
Visible Impacts
Stock: wealth position of creditors nations dwindles
(Major victims: China, Japan, OPEC, and the Asian NIEs)
Flow: US to print fiat currency and exports inflation to oil
consumers by keeping dollar cheap while draining resources
backwardly
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Forms of Wealth Transfer
Invisible Impacts
exchange rate manipulation (viciously neglected!)
To reap and manage creditors assets according to the terms
dictated by the Fed!
Dollar-anchored Central Banks (CBC) deprived of policy
autonomy
Hypothesis awaits verification: game-based economic warfare
in disguise staged by the US without declaration!
Dollar intrigue has positioned the US in a superior bargaining
lever (70% of world trade invoiced in dollar)
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Hedging for Profit or Risk Management?
 Exchange rate risks and losses rise against dollar volatility
(slide)
 Losses are greater the more exported products are priced in
dollar and sourcing of intermediate inputs priced in non-dollar
 Chaos evidenced throughout chain-linked turmoil in crude
futures, the housing mortgages and other financial derivatives
traded in US dollar.
 Critics bypass the more significant role of the derivatives
markets
 Drawing the borderline demarcating the role of financial
derivatives market between risk-hedging and speculative gains:
a barometer for diagnosing the world financial health
 US monetary-financial authority, again, choose to neglect!
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The Petrodollar Standard
 World monetary-financial system in chaos in post-Bretton
Woods era
 Causes of world financial crisis still to be explored in depth
but in origination crude oil denominated in US dollar (dating
from 1973) is considered decisive in crisis contagion
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Divorcing from the Dollar World
 For GCEA, divorcing from the dollar world towards a “common
currency area” is a priority for engineering a paradigm shift
 Officially, the SCA is not an object of immediate concern for
Beijing and Taipei
 Switching from one system to a qualitatively different one is a
multi-faceted and dynamic process of path searching and
selection
 System-switch involving more than one economy has to
coordinate the decisions and efforts of all relevant participants
 As a comparison, the euro-propelled EU expansion is a musclebuilding process, whereas for the GCEA crisis- insulation is more
decisive
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Consensus Building
 Contacts and resolution of issues on cross-Strait flows and
cooperation resurface after power switch
 The proposed CECA pact with Beijing signals an advance among
others for cementing bilateral
 It is high time to examine the claimed merits for establishing a
yuan-bloc
 The case is much simpler for launching the common currency in
Hong Kong
 Throughout the negotiation process tripartite consensus- building
is indispensable
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Slow or Fast Track?
 Choice between slow and fast track in monetary union is
preconditioned, weighted by decision-makers’ preferences
 The Mundell-Balassa model has often been employed as the
orthodox blueprint for monetary integration processes (hailed as
the economist approach in the EU)
 The EU model is unique; the validity of this model cannot be
duplicated without modifications
 In the case of GCEA the fast track would be the more credible
(hailed as the monetarist approach) with crisis-circumventing as
the top priority
 Owing to the disproportionate weights of the GCEA-trio the
proposed SCA is supposed to share greater resemblance with
Slovenia’s entrance into the Eurozone
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Monetary Union Depend on Pay-Offs Simulations
 Decision to move towards a yuan-bloc conditional upon
differences in the outcome of simulated intertemporal pay-off to
the GCEA-trio in question
 Two sets of criteria are employed for assessing differences in the
outcome: i.e. visible and invisible wealth transfer
 Three scenarios may be envisaged depending on the extent
according to which the avowed decision is endogenous to the
transfer processes: high, medium, and low
 In the extreme (highly endogenous) case, creation of the yuanbloc would trigger worldwide massacre of the dollar assets of
which China, boasting huge dollar assets, becomes a major victim
of its own decision
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Monetary Union Depend on Pay-Offs Simulations
 Concurrent with downsizing of the dollar world panic sale-off would
drive the global economy to the brink of collapse
 A dilemma in decision-making arises henceforth which is clearly
undesirable but one that was not a problem for the EU
 It seems illegitimate to contend that the polar opposite (low
endogenous) scenario is more likely
 The intermediate scenarios cannot be ruled out a priori
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Objective Convergence Criteria versus
Political Economy
 EU economic and monetary integration: highly politically
motivated
 EU was not an OCC but a quasi-OCC up to the time when Single
Market was formed in 1993
 Evidences: greater intra-community convergence in terms of comovement dynamics over the interval 1966~79 and 1979~92:
Cross-country correlation in employment growth grew from 0.49 to
0.63
Intra-country correlation decreased from 0.33 to 0.13 while that
between selected sub-regions (e.g, Italy and Germany) increased
from -0.09 to 0.23
 EU expansion: picking accession candidates for widening
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Similarity and Differences: EU and GCEA
 Similarity (hypothesis):
Along axis-1 and axis-2: cross-Strait economic co-movements greater
between sub-regions than broad economy
Absorption (akin to EU-widening after 2004): small parts (Taiwan and
Hong Kong) being subsumed and assimilated (hypothesis to be rectified)
into PRC instead of reciprocal assimilation between equal partners
 Differences (hypothesis):
Along axis-1 and -2: GCEA based on disparate weight and greater interGCEA division of labour of the trio (in contrast to the oligopolistic power
structure and greater intra-EU division of labour)
Motives for building the yuan-bloc: to disengage from the dollar world
Rationale: ascertaining “boundary conditions” for building the yuan-bloc
prior to fulfillment of the objective criteria furnished by the process
leading to the EMU
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Relevance of the EU Paradigm
 The schematic relevance of the EU paradigm to GCEA can be
examined through two perspectives: that of the continued
eastward expansion of the EU and the assumed non- optimality
of the dollar-based GCEA.
 Geopolitical considerations prevail over economic rationales in
post-2004 EU expansion.
 As a corollary, non-optimality of the dollar-based GCEA has two
dimensions.
 Dimension 1(hypothesis): to prove that the dollar standard
adopted in current GCEA-trio cannot be sustained (is nonoptimal); this may be verified by subdividing the wealth transfer
effect into a “visible” and “invisible” part (see §4.1.1), both in
terms of “stock” and “flow” by tracing associated changes in the
macroeconomic variables of the GCEA-trio as against the dollar
world
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Relevance of the EU Paradigm
 Deminsion-2 (hypothesis): to characterize the “boundary
conditions” (i.e. threshold conditions demarcating one currency
area from the other) by two methods: (1) the method of reductio
ad absurdum along the three axes with respect to the US
economy, respectively, and (2) the method for ascertaining the
requirements for upholding the yuan-bloc
 Addendum: there is no need to wait for RMB being made
convertible internationally for introducing yuan as the common
currency in GCEA; regionally convertible would suffice
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The Way Ahead: EU Paradigm Modified
 For many regional groupings on the pipeline creation of a
region-based monetary union remains an attractive but distant
luxury
 Following the launch of euro revived interests and aspirations to
the SCA duly followed throughout the world but mostly confined
to thought experiments
 Being a more compact and homogeneous entity the GCEA
looks fit to initiate the project with less visible hindrance
compared to ASEAN-plus
 However, to divorce from the crisis-plagued dollar world the EU
paradigm will have to be modified
 In the same spirit this paper seeks to identify the prospect of
similar design for the GCEA
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The Way Ahead Trouble-Maker: The US Ultra-Liberalism
 Source of trouble: world financial crisis originates almost
exclusively from the US
 Ultra-liberal capitalism: in genesis current crisis is totally different
from that characterized by market disequilibrium, financial
speculation, or trade cycle
 Triple crisis in one: globalized US terrorism consists of oil,
housing, and financial derivatives--each having a life cycle of its
own emanating from a built-in system sclerosis exacerbated by
decades-spanning twin-deficits (plus the credibility deficit of US
Administration)
 Burden diversification: unable to survive on its own US decisionmakers have opted for an easy way out, to export home-grown
disaster abroad
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The Way Ahead Trouble-Maker: The US Ultra-Liberalism
 Disengage from the dollar world once for all: it is feared that
the US-germinating crisis will acquire a permanence of its own
and resurrect in transformed form in one way or the other in
the future
 Means for doing so: a fundamental switch in monetary system
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The Way Ahead: CAD Prior to OCA in System Switch
 Framework for conducting system switch analysis (separated by
boundary/threshold criteria of two currency regimes): static and
dynamic
 Comparative static (temporal equilibrium)
Two forms of decision rule (hypothesis) put forward in this paper
First rule in system switch (A): (CAD-based) net inter- regional
transfer accrued to the OCA in question is positive
Second rule in system switch (B): net intra-regional transfer
accrued to the OCA in question is positive
Third rule (C): conventional OCA theorem (Balassa-Mundel)
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The Way Ahead: CAD Prior to OCA in System Switch
Application of the first rule for GCEA: net simulated (static)
potential losses (gains) after transition by adhering to the dollar
standard is greater (less) than that by adopting the yuan standard
Priority in use of decision rules based on set theory: C⊂B⊂A
System switch pays provided it can be validated by the results of
simulation conducted for each of the GCEA-trio
 Addendum (omit)
Dynamic (intertemporal equilibrium)
Invisible output-impact transfer due to changes in the degree of
policy autonomy)
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Final Remarks
 Ranking in hierarchical order, CAD is the fundamental whereas OCA
the secondary criteria in ascertaining the boundary conditions
separating members from non-members of a monetary union
 A monetary union is not just an emergency exit but a more durable
artificial construct aimed at weathering the storm of future crisis; the
disproportionate size of the GCEA-trio compared to that of the EMU
suggests that considerably less coordinating efforts are involved in
creating the yuan-bloc
 The yuan-bloc is created in three consecutive steps but a quick fix is
preferred
 A multi-polar world is not feasible without yuan being made a key
international reserve currency
 A handsome amount of arguments and contentions presented in this
essay are subject still to empirical verifications
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Thank you for your
attention！
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