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VIETNAM ACADEMY OF SOCIAL SCIENCES GRADUATE ACADEMY OF SOCIAL SCIENCES PROBLEMS OF THE CURRENT EUROPEAN COMMON CURRENCY AND IMPLICATIONS, POLICIES FOR THE SOUTHEAST ASIA VUONG THU HUONG Major: International Economy Code : 62 31 01 06 SUMMARY OF DOCTORAL DISSERTATION Hanoi – 2017 The Dissertation is completed at: The Graduate Academy of Social Sciences Vietnam Academy of Social Sciences Academic Supervisor: Assoc Prof., PhD DINH Cong Tuan PhD LE Thanh Binh Commentator 1: Prof PhD DO Duc Binh Commentator 2: Assoc Prof., PhD LE Xuan Ba Commentator 3: Assoc Prof., PhD NGUYEN Minh Quang The Dissertation is defended in the presence of the Board of Examiners at the Graduate Academy of Social Sciences on of…., 2017 The Disertation is available at the National Library of Vietnam and the Library of the Graduate Academy of Social Sciences PREFACE Necessity of the thesis European common currency was officially introduced on January st 1999 There are currently 19/28 countries using this currency, which is called “Eurozone” Eurozone was the first and only economicmonetary union, which is considered to be a successful and potential model for diversification and development all over the world However, in recent years, Euro has been experiencing devaluation and decreased belief due to pressure of public debts within the EU members, inefficiency in the administration and operation of Euro and negative impact from the U.S financial crisis in 2008 These have had a significant effect on Eurozone, even put Euro into threat of existence Nowadays, ASEAN members have actively made effort to form ASEAN Community with main pillars That ASEAN members have been in closer and closer cooperation leads to an idea of establishing a common currency From the fact of Euro, nations in South East Asia need to well prepare before deciding to form the second economic and monetary union Moreover, considering the currency fluctuations in Eurozone, nations in ASEAN should take caution of the potential similar issues and challenges when establishing the economic-monetary union in the area There has not been any domestic or international research on the above mentioned case so far Therefore, the topic “Current issues of European common currency and some implications for the nations in South East Asia” will certainly play a critical role in both theory and practice It has been chosen to be the research topic of PhD student for her economic thesis Research purpose and mission of the thesis 2.1 Research purpose Based on the analysis of the devaluation and decreased belief in Euro in the public debts crisis of Eurozone, and the forecast about the potentials and impacts of Euro on Eurozone and the world, the thesis implies relevant policies for enhancing a sustainable economic union, leading to a common currency in AEC area, as well as necessary adopting policies for Vietnam 2.2 Research mission  Systematize, analyze and clarify the theoretical basis and process of the formation, results of real activity of the common European currency  Clarify events and causes leading to the devaluation of Euro and decreased belief in Euro; analyze relevant solutions and their potential impacts on Eurozone and EU  Summarize experiences drawn from the economic-monetary union model in Eurozone and suggest some solutions to enhancing connection and forming a common currency in AEC area; imply relevant policies for integrating and purifying the fiscal – monetary market in Vietnam Objects and scope of the thesis 3.1 Research objects The thesis focuses on clarifying the theoretical foundations and actual conditions of the common currency, the main causes and effects of fluctuations and devaluations of the common currency, at the same time, in-depth study of common policies of the community, as well as of the nation to stabilize the common currency and national financial systems 3.2 Scope of the thesis Scope of content:  Factors causing the instability and devaluation of Euro and decreased belief in Euro  Some fiscal solutions and policies to control public debts and improve the administration of the economic – monetary union of members in Eurozone and EU in the case of the global financial crisis and great depression in 2008  Necessary policies to enhance the stability and efficiency of the economic – monetary union within ASEAN and Vietnam from experience from Eurozone Time range: from the introduction of Euro to present, focus on the period 2008 – 2016 and 2025-2030 Research methodology of the thesis  Synthesize and analyze secondary data are mainly used in collecting and processing data in books, newspapers, scientific research and related state statistics  Expert consultant and inheritance science are used in individual consultation and reference, indirect quotes of statements and opinions of some international fiscal – monetary organizations, economic experts, managers and leaders of well-known countries  Statistic method is mainly used to collect timely and systematic data for comparing, assessing and identifying factual fluctuation of Euro and economic – financial status in Vietnam  Case study method: research based on facts of some typical countries in the united area (France – German and Greek – Spain)  Comparison method is used to support for assessing public debts and managing public debts of Eurozone and other areas in the world as ASEAN  New contribution to scientific research of the thesis  Contribute to systematize and deeply analyze theory about introduction, two-side effects and political factors that affect stable existence and belief of common currency  Assess consequences of public debts, control mechanism of state budget deficit and public debt; assess practical solutions to public debt, improve control ability of the stability of common currency and forecast the potentials of Euro and Eurozone  Propose some implications in the economic – monetary union as AEC and particularly Vietnam in integrating in the area and in the world Theoretical and practical significance of the thesis  The thesis partly contributes to systematize and analyze the theoretical base for the introduction and operation mechanism of a common currency in the economic – monetary union in the area  The thesis partly warns and proposes some vital policies in pushing uniting economy – currency of members in AEC and control of public debt, deficits of state budget, and bad debts of Vietnam Structure of the thesis The thesis “Current issues of European common currency and some implications for nations in South East Asia” includes chapters (excluding Preface, Conclusion, List of abbreviations, List of table and List of reference): Chapter 1: Overall of the research Chapter 2: Theoretical and practical base of common currency Chapter 3: Issues and solutions to Euro and Eurozone since 2008 till present Chapter 4: Some implications for managing the economic – monetary union in AEC and purifying Vietnamese financial status CHAPTER 1: LITERATURE REVIEW Domestic literature review 1.1.1 Researches on international integration  Nguyen Quang Thuan and Bui Nhat Quang, in Social model of European developed countries: A lesson for Vietnam (2011), systematized theories of the formation and operation of the typical social model in some European countries, which heavily prioritize environment protection and social securities  Luu Ngoc Trinh, chief editor of World economy and politics in 2020 (2012), predicted how the world economy and politics would change in the next 10 years and its impacts on Vietnam’s development orientation and foreign policies 1.1.2 Researches on EU and the Euro  Nguyen QuangThuan (2009) The consequences and solutions to European Financial crisis The European Magazines, 7, pp.24 evaluated the impacts of the economic crisis and public debt in EU, provided solutions and development opportunities for the near future  Bui Duong Nghieu (2004),The international status of Euro and influences on monetary system In this book, Bui stated that the issuance of Euro had an effect on not only the European economics and society but also the world monetary system, including Vietnam 1.1.3 Researches on ASEAN and financial management in Vietnam  Nguyen Hong Son (2009), The ASEAN Economic Community Hanoi: Labor Publishing House The book was a review about the foundation of ASEAN Economic Community (AEC) as the realization of the region’s end goal of economic integration  Dinh Cong Tuan (2014), Public debt in Vietnam from European experience, Hanoi: National Political Publishing House, is of primary importance and practical significance The book consists of the work from leading economist and researcher, provides a clear view on public debt of some European countries 1.2 International literature review 1.2.1 Researches on monetary theories  De Grauwe, P (2000) Economic of monetary union Oxford university press, review the costing theory and the advantages of a common currency, introduced the European Monetary System, European Central Bank and its monetary policies 1.2.2 Researches on unstably of Euro  In the study entitled "Optimum Currency Areas and the European Experience", the author points out that the optimal monetary area is a union of countries with a high levels of economic integration including goods and services, financial assets and labor markets It is an area where monetary efficiency is achieved through accession to a fixed exchange rate system The author argues that Europe has no significant labor mobility due to cultural differences, trade unions and regulations Finally, the author concludes that Europe is not an optimal monetary region 1.3 Evaluation In general, both domestic and international studies have diverse subject matters and contents that allow the shaping of a fundamental theory: foundation for the creation of a common currency, indicating the conditions of formation and the restrictions when developing the common currency for the region Many works have focused on clarifying the idea of the formation of EU, the Eurozone and Euro, the steps of the process of establishment and the operational mechanism for managing the currency In addition, the studies also analyze and mention to a certain extent the positive impact of the euro on Europe in particular and the world in general; recognizing some of the initial successes in practice of the Euro A number of studies have focused on the fluctuation of the euro, particularly in the period from 2008 to date, and highlighted the multifaceted effects of the euro on Europe and on some of the world's great finances center, as well as the competition and counterweight to balance the dollar in financial transactions around the world The research results will be analyzed, absorbed, inherited in the thesis However, many issues regarding the necessity and roadmap to the foundation of the common currency for AEC, have not been Underestimating the underlying principles and conditions for the introduction and operation of the single currency may increase the negative impact and reduce the positive impact of the default on the establishment of the economy alliance This would also have a negative impact on the country's social and economic status, image, strength and international status CHAPTER ISSUES AND SOLUTIONS FOR THE EURO AND EUROZONE FROM 2008 TILL PRESENT 3.1 Some issues in the operation of the Euro and Eurozone period 2008-2016 3.1.1 Devaluation of the common currency The devaluation of the euro contains both positive and negative aspects of the Eurozone economy On the one hand, the weak Euro will bring more competitive advantages for exporters, especially in economies that depend significantly on exports of goods and services such as Germany and Italy However, when the euro depreciates against the dollar, it causes the negative opposite in importers due to increased costs of raw materials, oil, gas and energy Is when the devaluation Euro reflects the weakness of the Eurozone’s economy 3.1.2 The common currency is losing its position and faith The diminishing trust and the deterioration of the euro area have also been dulled by the trend of lower euro-denominated payments and 15 reserves; slower pace of membership and increased centrifugal thinking, with the typical Brexit event - England leaving the EU 3.2 The main causes 3.2.1 The public debt burden of the members However, after 2008, public debt in EU member countries tended to increase significantly, most of the public debt of EU countries exceeded the threshold of the block (60%), due to loose fiscal policies and ineffective public finance management When the crisis began, in order to save the economy, nations must increase public expenditure, turning private debt into public debt From 2010 to 2015, the euro zone's public debt performance deteriorated as public debt rose from 65% in 2007 to 85% in 2010, and the budget deficit continued to exceed the 3% limit of EU regulations 3.2.2 Vulnerability mechanism of internal financial security control The ECB implements centralized monetary policy while decentralized fiscal policy decisions belong to the member countries, where national spending is loose and uncontrolled Nearly every country is trying to pursue its own public debt policy goals, because the EU does not have much power in shaping the economic policies of its members 16 3.2.3 The consequences of the financial crisis and global economic recession 2008 and the "Brexit" The 2008 US financial-monetary crisis has been the most severe in more than 50 years and its negative global impact has had a negative impact on members of the euro area The resonance of such effects will undermine the economy of the Eurozone, which means increasing public debt pressures, imbalance payments and the state budget, reducing foreign exchange reserves , the negative impact of the public debt burden and the Euro area financial management loophole as analyzed above, i.e increased volatility that undermines value position and trust in the Euro In addition, the problem of the euro is exacerbated by the negative impact of the "Brexit" event - the UK leaving the EU 3.3 Solution and prospects of Euro and Eurozone 3.3.1 Some major solutions 3.3.1.1 Enhancing the ECB's active role and flexibility of monetary policy in the direction of loosening the ECB This is the mainstream solution used in the past few years The ECB has taken a series of measures to restore the economic growth of the Eurozone, such as cutting interest rates, increasing bond purchases to 80 billion euros a month, and providing cheap loans to Bank 3.3.1.2 Tightening discipline and increase fiscal responsibility of each member country 17 In order to ensure the stability of the Euro, in addition to the policies used by the ECB, Member States also have their own policies Although the policies set out to stabilize the common currency of EU Member States are different, most countries are involved in accelerating the structural reform of the entire bloc, shortening the gap among member countries, creating unity in the whole mass Germany and France are the two countries playing a major role in the development and implementation of the common currency project, which has a large impact on the euro and has a high proportion of currency in the euro They have taken aggressive responses to stabilizing the euro and putting it into use through the issuance of large-scale euro-denominated bonds 3.3.2 Prospect forecast for Euro, Eurozone and EU 3.3.2.1 Challenges for EU Regarding the prospects, many opinions of both leaders and citizens, European and world businesses are concerned about the pressure of further weakening the strength and position of the currency, weakening economic growth and Eurozone inflationary pressures, as well as the post-bourgeois political risks, will be more and more burdensome Given that background, the future of the EU has many opportunities, but also contains many challenges as follows: 18 Firstly, the EU will have to witness the rise of localization, regionalization and even separatism based on what the Scottish nationalist movement and the Catalan / Spain This shows that the EU and Eurozone countries tend to self-determination instead of waiting for the Alliance Secondly, the future of the EU as well as the Eurozone will increasingly depend on Germany and Germany increasingly play a dominant role in the bloc Meanwhile, the influence and economic strength of France and Italy are increasingly declining and England has "definitely" left the EU Third, the EU will see major changes in the future due to the challenge of aging population and low birth rates 3.3.2.2 Possible scenarios In particular, on March 6, 1977, European Commission President Jean-Claude Juncker published a "white paper", outlining five future European scenarios for the next 10 years: In the first scenario, the European Union retained its 27 member states (without the UK) and introduced comprehensive economic, political and security reforms In the second scenario, the European Union is merely an economic alliance This means that the 27 member states are in a general economic market, with no political or social ties The third scenario, proposed by German Chancellor Angela Merkel and French President Francois Hollande, aims to build "a multi-level Europe." The EU will be divided into two groups: developed 19 countries such as Germany, Italy, France, Spain and a group of slow developing countries such as Eastern Europe and the Baltic The fourth scenario, with European policy, only co-operates on security It means building a common police force, exchanging intelligence with each other daily, working together in the fight against terrorism and crime The fifth scenario proceeds to build Europe as a federal state, which includes many independent states This is an ambitious scenario In the above five scenarios, it is likely that Europe should only build a second scenario - only the general economic market The remaining scenarios are not highly feasible Summary of Chapter 3: As with any economic bloc that always has its problems, the Euro and the Eurozone, even the EU, have their weaknesses The European Commission has been very active in overcoming the shortcomings of the last 20 years and has achieved some successes However, the agency will have to work harder to be able to restore all restrictions The strength of the currency depends on the strength of the economy, the euro is no exception Maintaining a strong and stable euro is a challenge for the participating countries, when a mix of developed economies at different levels, each with its own difficulties Compromising the interests of countries is a tough struggle that requires the great compromise of every member country, especially striving to ensure that imposed norms and strict policies of the 20 spending on social welfare in the budget, tax policy-which can cause strong reactions among people, especially in the poor, in the education sector, which has taken place in many Western European countries over the past few years, and will make it difficult for governing governments at every election The emergence of EMU and the maintenance of a stable and stable common currency have not only positive implications, but also make it difficult for EMU participants In the context of monetary policy co-ordination, the European Central Bank's mandate to regulate monetary policy of the entire bloc will force EMU participants to lose the tools to regulate the economy and will It is very difficult for countries when economic crisis An uncertain future is in place and depends on the degree of success in resolving the issues faced by the common currency sector, particularly the public debt burden, internal institutional gaps in money management and financial discipline, restoration of confidence in the solutions that the EU has been implementing CHAPTER SOME IMPLICATIONS OF POLICIES FOR MANAGING ECONOMIC – MONETARY UNION IN AEC AND PURIFYING THE NATIONAL FISCAL MARKET IN VIETNAM 21 4.1 Some content orientations and implications of policies in the economic – monetary union in AEC in comparison with Eurozone 4.1.1 Activities about economic cooperation in AEC In ASEAN – Summit in Bali (Indonesia) in October 2003, leaders of ASEAN nations decided to establish AC in 2010 with main pillars: security – defense, economy and culture – society The overall target of AC is to make the Association become “a united group of nations in South East Asia to form a collective community” Three pillars of AC include: ASEAN Security Community (ASC), AEC and ASEAN Socio - Cultural Community (ASCC) 4.1.2 Establishment of common payment in South East Asia (ACU) The idea of a common currency of ASEAN in a monetary alliance, whether resembles Euro or has AEC distinctive identity, has been concerned with for quite a long time amongst experts and researchers A common currency unit is even considered a deciding factor which will shift the equilibrium of the global monetary system It will also help ASEAN members in the fight against money speculation, reduce foreign exchange risk, encourage investing activities from both inside and outside the region ASEAN members with the help of ACU will be much more competitive in this globalization market There are two promising scenarios: 22 i) Establishing a common currency for payment (around 2035) for some of the countries with the highest levels of economic development and market institutions in the block, such as Singapore, Thailand, Malaysia, Philippines and Indonesia the remaining countries will join after maturing in economic and institutional conditions ii) Establishing a common currency for all members (around 2050), when all subjective conditions are met, and the economic gap between the members are shortened In both scenarios, it is probably best to remain individual currencies for each member However, it should be further studied whether the currency has the function of intra-aggregate payment or a common currency with functions such as the Eurozone today In order to form a common currency of ASEAN, the following remarks must be taken into account:  Economic integration should begin with attempts to achieve equal growth rate between the members Inequality, what is happening in Eurozone, should be avoid by all means  ASEAN needs a common financial support structure in case of an economic/financial/monetary crisis, either regional or global In other word, ASEAN needs an insurance to be able to deal with potential crisis in the future  ASEAN members should enhance the unity while keeping cultural diversification 23  Learning how EU dealt with the financial crisis (2008) and the public debt crisis (2009), ASEAN should be aware of the importance of balancing economic growth and fiscal policies 4.2 Recommended compatibility measures for Vietnam 4.2.1 Actively improve investing environment and strengthen regional relation Vietnam should focus on minimizing institutional, financial and prolonged processes in order to improve investing environment, while continuing to participate in international trade treaties 4.2.2 Balancing state budget and control public debt In order to control the state budget deficit, the Government needs more determined solution such as increase tax, cut expenses, limit overspending, Increase medium and long-term loan with appropriate interest rates, restructure debt portfolio to extend debt maturity, reduce debt repayment obligations, and strictly control government guarantees, local government debt, construction debt, manage foreign debt and government loans, manage and evaluate the efficiency of the use of capital in accordance with regulations 4.2.3 Deal with bad debts and restructure credit institutions on the principle of market SBV should accelerate the restructuring of the financial market with a focus on the commercial banking system and financial institutions, restructure and resolve the problem of bad debt, diversify and 24 improve the efficiency of the market, develop the debt market, derivatives market, asset leasing, credit market and banking services to meet socio-economic development requirements and in line with international commitments Restructuring weak commercial banks play an important role and should be done promptly in the process of restructuring and ensuring healthy credit institutions 4.2.4 Appreciate the management of financial and monetary information security The national monetary and financial system plays a very important role in ensuring macro stability and circulating capital and money in the economy At the same time, the security of the system depends not only on the capacity and effectiveness of state policy management and related organizations, but also on the management of relevant informations In fact, the public debt crisis in the common currency area shows that there are many inadequacies in counterintuitive, accurate and manageable information on public debt, state budget deficits and bad debts of some commercial banks of the member countries This is more or less creating a crisis of communication and confidence in the financial situation of many countries, leading to a decline in confidence and an increased negative impact on status and prestige the currency and the Eurozone itself 25 Government agencies, according to their function, should continue to review and improve the legal system relating to information security; Ministry of Finance and the State need to proactively provide periodic, full disclosure and up-to-date financial and monetary information systems in accordance with state regulations and integration requirements Press and media management need to proactively detect and punish violations of the law on speech and information provision to the press, to perfect the publishing process, clarify responsibilities and strict penalties for violations in information retrieval, processing, writing and editing, publishing, ensuring the information quality in communication activities CONCLUSION In the case of closer and closer integration in the world, common currency will probably arise with various forms The introduction, existence and development of European common currency is an important historical mark in the movement process of a special kind of goods (currency) attached with the economic – monetary union in the area, which reflects objective demand of the globalization trend, in which the first and foremost one is to unify developed economic zone: Europe Euro, a typical feature in Eurozone, with its two-sided effect on the whole zone as well as each nation member, can be considered to be a 26 model for all countries and areas which are aiming at pushing and motivating to unify the connection between economy and politics However, that Eurozone has been experiencing many troubles with the continuous devaluation in recent years, especially Brexit event, has arisen even much more new issues which need to be reasonably identified to solve inadequacies in operation mechanism, repel worries, especially the opinion that unification about politics and economy as nowadays is not likely to be beneficial to all nation members In long term, if European Central Bank (ECB) and EU community not have relevant currency policy, the complicated movement of Euro, directly or indirectly, will have negative effect on productivity of enterprises and economy in Eurozone Consequently, the image and power of the whole EU community and international position of it will be badly affected The fact about Euro, Eurozone and EU, as well as the global financial crisis in 2008, indicates that there is no exception for any economic model, any nation or enterprise, despite being regarded as powerful and stable ones The world is changing quicker and quicker; the interrelationship between countries and close transformation between public debt and individual debt, between fiscal – monetary crisis and periodic crisis This leads to the need of a new administration model combined with the impact of both state and market role, especially public and transparent information and forecasted data to keep the belief and protect customers, coordinate everyone’s sake based on the demand for sustainable development 27 The devaluation and issues that Euro and Eurozone has been facing with show inadequacies of a united model which used to be considered as a common model for all economic union in the world for many decades This significantly impacts not only directly Eurozone and EU but also all over the world, including South East Asia The features in union model of EU and ASEAN are different, however, the devaluation of Euro and the crisis in Eurozone are valuable lessons for ASEAN, particularly Vietnam, in integrating into the globalization trend nowadays 28 LIST OF AUTHOR’S PUBLICATIONS I Articles in scientific magazines Vuong Thu Huong (2015), European Union Model: a lesson of economic cooperation for ASEAN, Vietnam Journal of SocialScience-Manpower, No 20 Vuong Thu Huong (2016), Seen from EU’s violation of “Optimal currency area theory”, Economy and Forecast Review, No 24 Vuong Thu Huong (2017), Some predictions about the risk of Eurozone cresis, Economy and Forecast Review, No 11 Vuong Thu Huong (2017), Looking back on the Euro theory basis after the Sovereign debt crisis and the European model, European Studies, No ... economics and society but also the world monetary system, including Vietnam 1.1.3 Researches on ASEAN and financial management in Vietnam  Nguyen Hong Son (2009), The ASEAN Economic Community Hanoi:... policies 4.2 Recommended compatibility measures for Vietnam 4.2.1 Actively improve investing environment and strengthen regional relation Vietnam should focus on minimizing institutional, financial... in South East Asia” will certainly play a critical role in both theory and practice It has been chosen to be the research topic of PhD student for her economic thesis Research purpose and mission