Regional Monetary Cooperation: Lessons from the Euro Crisis for Developing Areas?
Abstract
The euro crisis has highlighted the dilemmas of an ambitious regional monetary integration project with limited economic policy cooperation. What lessons can regional monetary cooperation schemes in other world regions draw from this experience? Three aspects of the euro crisis are identified as crucial: first, lack of fiscal cooperation, including the ability to enforce sovereign state insolvency; second, the need for a mechanism to extend lender-of-last-resort (LOLR) facilities to solvent yet illiquid sovereign member states; and third, the need for prudent financial regulation at the supra-national level. Against this background, the paper analyzes monetary cooperation schemes in South East Asia and Latin America, namely the Chiang Mai initiative, the Latin American Reserve Fund (FLAR), and the Asian Bond Market Initiative. While the euro zone faces the alternative of deepening or breaking up, the study shows that the cooperation schemes in Asia and Latin America – while less ambitious in scope – show surprisingly stable institutional settings despite little economic policy coordination. However, the euro experience shows that the need for deeper economic policy coordination increases as financial integration becomes more profound.