Part - I

Executive Summary

Just as Europe rose from the destruction of war and found the vision of a united and prosperous continent, Asia may likewise rise from adversity to achieve greater things. The "Asian Currency Union" might still sound like a joke to some, but the idea is definitely on the political agenda thanks to some not so narrow-minded leaders and strategic thinkers in the region. Even though an Asian currency union is a fantasy which ignores both economic and political realities, even respectable economists have opined on the matter. For example, Professor Robert Mundell, a Nobel laureate in economics, has made statements in support of the creation of an Asian currency union. Citing exchange rate volatility between the Japanese yen and the U.S. dollar as being a problem for Asian economies, he suggested introducing a common currency area for Asia patterned on the euro-zone.

Renewed economic strength and robust intra-regional trade open a window for Asia to move rapidly on the next steps towards potential monetary integration. It will be a long road. But the potential benefits in terms of smoother trade and investment, lower cross-border transaction costs, and stable exchange rates make it incumbent on the region to start seriously considering the possibility of a single currency and the transitional measures required to achieve it. There will be no shortage of hurdles to overcome. Asia includes countries with widely different levels of income and development. Some economies are open and integrated into global markets. Others are moving in that direction at varying speeds. But the 1997 financial crisis made it painfully clear that the region's economies are tightly linked. In recent years those ties have deepened further and intra-regional trade is now a key driver of growth in Asia. For this dynamic process of regional integration through trade and investment to be sustainable, intra-regional exchange rate stability and predictability are crucial.

It is expected that continuing trade integration in the region will lead to further synchronization of business cycles, thereby encouraging Asian countries to create a currency union in the region. In contrast to trade, however, financial liberalization in Asia tends to lead to more global integration, rather than regional integration, of the financial systems, and thereby is not likely to develop favorable conditions for forming a regional currency union among Asian countries. However, the main purpose of this paper is to develop a comparative perspective, in order to argue whether it is possible to apply the European Union style integration to the Asia Pacific region. It also analyzes whether Asia is suitable for forming an Asian currency union and creating an Asian dollar. On the basis of the theory "A Theory of Optimum Currency Areas" by Mundell in 1961, the research initially analyzes the costs and benefits of forming a currency union and examines the criteria among Asian countries. In terms of the experience of the European Union, this paper gives significant insight into the matter by comparing and contrasting Asian conditions with that of European conditions.

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* Contributed by -
Vipul Mittal,
First Year, MBA (Global),
IMT, Nagpur.