groupassignment international finance topic opportunities and challenges of the process of monetary unification southeast asia from the study of the unified currency of the european communities

I.Monetary Union DefinitionII.European Monetary Union 1.Overview of European Monetary Union 2.Positive effects of European Monetary Union to members3.Negative effects of European Monetar

NATIONAL ECONOMICS UNIVERSITYSchool of Advanced Education Programs

GROUP ASSIGNMENTInternational Finance

Topic: Opportunities and challenges of the process ofmonetary unification Southeast Asia from the study of the

unified currency of the European Communities.

2021

I.Monetary Union DefinitionII.European Monetary Union

1.Overview of European Monetary Union 2.Positive effects of European Monetary Union to members3.Negative effects of European Monetary Union to members

III.Southeast Asia Monetary Unification

1.Overview of Southeast Asia Regional Economic Integration and Cooperation

2.Opportunities of the process of monetary unification Southeast Asia

3.Challenges of the process of monetary unification Southeast Asia

IV Conclusion

Lists of group 1 members

References

Monetary union is considered to be the most highly developed form of

international economic linkages, not only reflected in the high unification in terms of finance - currency - economy, but also in monetary union It includes cultural, social and institutional integration Research on monetary union and its manifestation and impact on member countries or on the global economy, along with measures to promote positive roles and minimize negative impacts Negative behavior is always a topic of interest to many scientists

The most vivid manifestation of the process of monetary unification in practice is the European Union EU and the euro common currency Since its birth on January 1, 1999, through many ups and downs in history, now Euro is not only the second currency used in international trade relations but also It is a reserve currency for many countries around the world It is undeniable that the practical benefits that the EURO brings to countries in the region such as improving investment efficiency, reducing transaction risks, improving the country's reputation in borrowing, etc The European Union has also witnessed many turbulent times such as the bankruptcy of WorldCom in 2003, Madoff with the historic fraud of $ 65 billion, the global financial crisis of 2008-2009, the public debt crisis in countries like Greece, Spain… Lessons and long road the EU has gone through to be able to form a common currency and maintain its position until today has left a lot of bloody experiences for the related regions economic ties in the world, including Southeast Asian countries

In the context that the world's leading developed countries such as the US, Japan, and Europe are at a stage of stagnation, on the far east coast, the group of small but dynamic ASEAN countries with great potential for development is growing strengthen cooperation day by day in the region Officially established on

August 8, 1967, the Association of Southeast Asian Nations (ASEAN) has been growing and growing day by day with the slogan "One Community, One Identity, One Vision" Although also experiencing the shadow of the financial crisis in 1997 and being affected by other events of the world economy, ASEAN has always maintained its position as a dynamic economic and trade region of the world, a attractive land for investors around the world Through each step of cooperation development such as the Bali Declaration I and II, the AFTA Free Trade Area, etc., and recently the ASEAN Charter and the AEC Economic Community, it can be seen that ASEAN has been and is ready ready for the highest cooperation to increase the position and benefits for the region – moving towards a common currency Therefore, group 1 chose to research the topic: "Opportunities and challenges of the process of monetary unification Southeast Asia from the study

Lessons from the euro area and its own characteristics, opportunities, and challenges in moving towards a monetary union in Southeast Asia The assignmentconsists of 3 main topics as follows:

MONETARY UNION DEFINITION

A monetary union (currency union) is an intergovernmental agreement that involves two or more states sharing a common currency or equivalent

Monetary Union is understood as between the countries in the union there is a common monetary system, including the establishment of a bank, a common currency and the implementation of a monetary - credit and forex policy This is considered to be the highest development form of international economic integration, it is not only the maximum unification in terms of economy and currency, but also includes the relative unification in terms of economic integration cultural, social and political institutions

II EUROPEAN MONETARY UNION

1 Overview of European Monetary Union

The Economic and Monetary Union (EMU) is the result of progressive economic integration in the EU It is an expansion of the EU single market, with common product regulations and free movement of goods, capital, labour and services A common currency, the euro, has been introduced in the euro area, whichcurrently comprises 19 EU Member States All EU Member States – with the exception of Denmark – must adopt the euro once they fulfil the convergence criteria A single monetary policy is set by the Eurosystem (comprising the European Central Bank’s Executive Board and the governors of the central banks of the euro area) and is complemented by fiscal rules and various degrees of economic policy coordination Within EMU there is no central economic government Instead, responsibility is divided between Member States and various EU institutions

1.1 Understanding the Economic and Monetary Union (EMU)

The Economic and Monetary Union is a step that the EU took to further integrate the economic markets of the member states The EMU countries coordinate their economic and fiscal policy making initiatives and share a commonmonetary policy with a common currency – the euro

The fiscal policies are coordinated mainly through government deficit and debt limitations under the Stability and Growth Pact (SGP) According to the SGP, government deficits must be limited to below 3% of GDP, and government debts must be less than 60% of GDP

The monetary policy and euro are managed by the European Central Bank (ECB) and national central banks, with a medium-term inflation target of close to but below 2% across the eurozone The 2% inflation rate is considered to be optimal for economic growth and employment rate

Monetary policy decision-making is independent of outside influence The countries that are members of the EU but not within the eurozone coordinate their monetary policy with the ECB

1.2 History of the European Economic and Monetary Union (EMU)

At the summit in The Hague in 1969, the Heads of State or Government defined a new objective of European integration: economic and monetary union (EMU) A group headed by Pierre Werner, Prime Minister of Luxembourg, drafted a report outlining the achievement of full economic and monetary union within 10 years according to a plan to be carried out in several stages The ultimate goal was to achieve full liberalization of capital movements, the total convertibility of Member States’ currencies, and the irrevocable fixing of exchange rates The collapse of the Bretton Woods system and the decision of the US Government to float the dollar in 1971 produced a wave of instability in respect of foreign

exchange, which called into serious question the parities between the European currencies The EMU project was brought to an abrupt halt.

At the 1972 Paris Summit, the EU attempted to impart fresh momentum to monetary integration by creating the ‘snake in the tunnel’: a mechanism for the managed floating of currencies (the ‘snake’) within narrow margins of fluctuation against the dollar (the ‘tunnel’) Thrown off course by the oil crises, the weakness of the dollar and differences in economic policy, the ‘snake’ lost most of its members in less than two years and was finally reduced to a ‘mark area’ comprising Germany, the Benelux countries and Denmark

Efforts to establish an area of monetary stability were renewed at the Brussels Summit in 1978 with the creation of the European Monetary System (EMS), based on the concept of fixed but adjustable exchange rates The currenciesof all Member States, except the UK (when it was still part of the EU), participatedin the exchange rate mechanism, ERM I Exchange rates were based on central rates against the ECU (European Currency Unit), the European unit of account, which was a weighted average of the participating currencies A grid of bilateral rates was calculated on the basis of these central rates expressed in ECU, and currency fluctuations had to be contained within a margin of 2.25% either side of the bilateral rates (with the exception of the Italian lira, which was allowed a margin of 6%) Over a 10-year period, the EMS did much to reduce exchange rate variability: the flexibility of the system, combined with the political resolve to bring about economic convergence, achieved currency stability However, as a result of speculative attacks against several currencies in 1993, the fluctuation margins were expanded to 15%

With the adoption of the Single Market Programme in 1985, it became increasingly clear that the potential of the internal market could not be fully achieved as long as relatively high transaction costs linked to currency conversion

and the uncertainties linked to exchange rate fluctuations, however small, persisted In addition, many economists denounced what they called the ‘impossible triangle’: free movement of capital, exchange rate stability and independent monetary policies, which were deemed incompatible in the long term.

In 1988, the Hanover European Council set up a committee to study EMU under the chairmanship of Jacques Delors, the then Commission President The committee’s report (the Delors report), submitted in 1989, proposed strengthening a three-stage introduction of EMU In particular, it stressed the need for better coordination of economic policies, the establishment of fiscal rules that set limits for deficits in national budgets, and the creation of an independent institution that would be responsible for the Union’s monetary policy: the European Central Bank (ECB) On the basis of the Delors report, the Madrid European Council decided in 1989 to launch the first stage of EMU: the full liberalization of capital movements by 1 July 1990

In December 1989, the Strasbourg European Council called for an intergovernmental conference to identify what amendments to the Treaty were needed in order to achieve EMU The work of this intergovernmental conference led to the Treaty on European Union, which was formally adopted by the Heads of State or Government at the Maastricht European Council in December 1991 and came into force on 1 November 1993

The Treaty provided for EMU to be introduced in three stages (some key dates of which were left open and would be set at later European summits as eventsprogressed):

Stage 1 (from 1 July 1990 to 31 December 1993): establishing the free movement of capital between Member States;

Stage 2 (from 1 January 1994 to 31 December 1998): convergence of Member States’ economic policies and strengthening of cooperation between

Member States’ national central banks The coordination of monetary policies was institutionalized by the establishment of the European Monetary Institute (EMI), which was tasked with strengthening cooperation between the national central banks and with carrying out the necessary preparations for the introduction of the single currency The national central banks were to become independent during thisstage;

Stage 3 (implementation of a common monetary policy under the aegis of the Euro system from the very first day and the gradual introduction of the euro notes and coins in all euro area Member States Transition to the third stage was subject to the achievement of a high degree of durable convergence measured against a number of criteria laid down by the Treaties The budgetary rules were to become binding and any Member State failing to comply could face penalties The monetary policy for the euro area was entrusted to the Euro system, made up of thesix members of the ECB’s Executive Board and the governors of the national central banks of the euro area

In principle, by adhering to the Treaties, all EU Member States agreed to adopt the euro (Article 3 of the TEU and Article 119 of the TFEU) However, no deadline has been set and some Member States have not yet fulfilled all the convergence criteria These Member States benefit from a provisional derogation Furthermore, the United Kingdom and Denmark had given notification of their intention not to participate in the third stage of EMU and therefore not to adopt the euro Since the United Kingdom left the EU in 2020, only Denmark currently benefits from an exemption with regard to its participation in EMU’s third stage, but maintains an option to end its exemption The exemption arrangements are detailed in a protocol annexed to the EU Treaties At the time of writing, 19 of the 27 Member States have adopted the euro

Thus, going through 3 stages of development with an arduous struggle of the Governments of the EU countries to realize an economic and monetary union, the Euro has developed from its infancy to its presence in all transactionsbetween Eurozone countries, becoming an important factor promoting trade activities between these countries and at the same time enhancing the position of the European Union EU in the international economic - financial market.

2 Positive effects of European Monetary Union to members

The fact that 11 countries initially joined the European Monetary Union (EMU) with 290 million people and then 7 countries which joined has formed a large market in the world and an economy roughly equivalent to that of the United States with a high level of economic development Currently, the strength of the EU is the synergy of the member states and the EU will act for the common interests of the whole EU instead of a few key countries as before Thus, the EU countries have become a stronger economic bloc, more closely linked, and therefore the status of the EU will be enhanced, especially in economic relations with the US With a common currency of 18 countries, the world will have to accept the EU as a unified entity, not as separate countries Besides, the influence of EU countries on world politics will be widespread

The establishment of the EMU and the EURO will promote the economic development of the EU countries, promote the process of economic linkage between these countries, facilitate the implementation of the European monetary and economic union, and move towards unification Europe economically and politically The introduction of a common currency will contribute to the completion of the European common market, the removal of remaining non-tariff

barriers, positive impacts on economic, financial and investment activities, and savings in operating costs According to a 1988 report and the European Commission, the implementation of a monetary union could benefit the EU countries by about 200 billion ECU and help to increase the GDP of the member countries by 1%.

2.2 The European Common Market becomes more homogeneous and efficient

With a common Euro currency, consumers and businesses in the European Union can compare prices of goods and services more easily, therefore prices are transparent between many member states, promote exchange and trade, increase consumption, develop the market for goods and services Thereby creating a fierce competitive environment among businesses in the EU, trying to both reduce production costs and lower product prices while still ensuring the quality of servicefor fastidious customers As a result, the living standards of people in this common currency block are increasing

All transactions in this region are unified by a common monetary system in the fields of banking, insurance, investment funds, pension funds, etc At the same time, by small capital markets and decentralization among countries have combined into a stronger and more liquid financial market, improving the efficiency of capital investment in the EU

2.3 Reduce risk and risky insurance cost, encourage trade and investment

The appearance of the Euro helps member states avoid the pressure of a sudden devaluation of national currencies as well as speculators taking advantage of the currency's instability to affect the development of Europe’s economy The 1992 European Monetary System (EMS) crisis is an example To attract foreign currency to cover the costs of reviving East Germany's bankrupt economy, Germany adopted a policy of keeping high interest rates that international

capitalists were attracted to profits then they has poured money into Germany; Meanwhile, with the aim of fighting inflation, France wants to maintain a moderately low interest rate But because all currencies in the EMS are closely related, France cannot unilaterally lower interest rates without causing the French franc (FF) to depreciate against the German mark (DM) Speculators calculated that it was time for the FF to depreciate and they focused on attacking the FF As a result, the FF currency was devalued and the EMS was affected The crisis of the European Monetary System (EMS) in 1992-1993 made the European monetary system as well as the member states' economies wobble and suffered a lot of damage The instability of the European currency caused the loss of 1.5 million jobs in the EU member states in 1995 A stable exchange rate helps to create confidence in investors, thereby reducing costs and other investments instead.

The Euro also contributes to stimulating international investment activities because investors can easily move capital within member states, reducing foreign exchange transaction costs, unified market and prices more stable On the other hand, thanks to the macroeconomic stability from the monetary and economic stability of the member states due to the common monetary policy and collective intervention measures, the EU investment environment will become more attractive, have more investments from outside and promote investment within thebloc

In addition, because trading within EU countries accounts for 50-60% of the bloc's foreign trade, the use of a common currency will facilitate promoting foreigntrade between EU countries without being adversely affected by exchange rate fluctuations of the US dollar Along with preferential treatment, removal of non-tariff barriers, all goods and services are listed in Euro, therefore reducing the difference about prices between intra-regional countries, promoting trade in goods and services, tourism services, import and export

3 Negative effects of European Monetary Union to members

3.1 Challenges in handling monetary policy in each country

When the ECB takes responsibility for managing the monetary policy of the Eurozone, the European countries lose their rights in controlling the economics Joining EMU makes them give up regulating monetary policy while their fiscal policies are under the binding influence of the Stability And Growth Pact From that, these governments will have big troubles following some policies such as cutting off expenses, raising the tax, etc The fact that the fiscal policies of countries are not homogeneous, debt loans, and government spending is not strictlycontrolled, are some of the main reasons why Greece falls into the government debt crisis At that time, to be able to receive bailout packages from the EU, Greeceis forced to implement austerity policies

3.2 One interest rate can not be suitable for everyone

Normally, the high growth country ought to have high-interest rates to prevent inflation, overheating, and an eventual economic crash The low-growth country should lower interest rates to stimulate borrowing Unfortunately, interest rates cannot be simultaneously raised in the high growth country and lowered in the low growth country when a single currency (meaning that a single interest rate)is set by the European Central Bank For the single currency to work, this single rate must be suitable for all member states It is difficult to see how a single rate could be suitable for all of the economies in all foreseeable situations

As growth slowed and unemployment increased in countries like Italy and Greece, investors feared for their solvency, driving up interest rates Typically, there would be no solvency fears for governments under a fiat money regime