What Asean can learn from EU crisis

30 Mar

By: Rudi Winandoko

This writing is not to compare European Union and ASEAN. Two regional groups have very different social and economic characteristics. Based on GDP, economic power of EU is more than nine times that of ASEAN. EU also already started their integration in 1958, long before Bangkok Declaration of ASEAN. Despite the differences between EU and ASEAN, current EU crisis may give ASEAN valuable lessons ahead.

Eurozone crisis was triggered by many complex factors. Although economists might argue what the real cause of crisis, there are at least three interrelated factors in eurozone crisis for which ASEAN can take lessons.


First, disparity in economic competitiveness of member countries. It creates trade imbalance. Strong economies, such as Germany, have exports whose value is far exceeds their imports.  At the same time, weak economies, such as Portugal, Ireland, Italy, Greece, and Spain (PIIGS) are in the opposite condition.

PIIGS export products had lost competitiveness in global markets, and then caused PIIGS to rely more on debts to finance their trade deficits. Euro, as a single currency, exacerbates the situation since PIIGS cannot devalue the currency to make their products cheaper.

Because of persistence trade imbalance, weak countries accumulate debts until reaching a point where they cannot longer pay. Their behavior is driven by the fact that incentive to collect debts increases along with a decreasing interest rate after they joined euro.

Second, lack of commitment from EU leaders. In 1992, Maastricht Treaty explicitly said that euro members must have a maximum 3% of GDP in annual borrowing limits and 60% of debt to GDP ratio to ensure the stability of eurozone and prevent reckless fiscal behavior. Years later, everyone seems to forget they ever have one.

Needless to say that Greece already ignored this restriction and bring its economies to 12% of budget deficit and 160% of debt to GDP ratio. Some media in euro area even contend Greece had their own class of manipulating Maastricht rule by using complex derivatives and financial engineering.

What bothers us are Germany and France, two biggest countries in eurozone. They also exceeded the minimum rules by making a 4% and 7% on budget deficit and 83% and 82% on debt to GDP ratio, Germany and France respectively. It leads us to a perception that EU leaders cannot handle their own rules.

Last week, EU member countries, except UK and Czech Republic, have signed a landmark fiscal compact treaty to improve previous agreements. They made the rules stricter, like granting rights for European Court of Justice to check whether countries implement budget rule properly and creating automatic mechanism to force countries to correct budget. It still needs to be proved whether they actually can implement new rules consistently.

Third, loss of confidence in all euro members. This factor is common response to all previous factors.  Market became anxious to see whether euro currency can be maintained and leaders have an ability to contain crisis. The interest rate indicators shows that Euro countries have reached a highest point since inception of Euro, meaning publics don’t have much faith to Euro economy.

Concern of worsening crisis became increasingly significant after rating agencies responded to the crisis by reducing sovereign ratings of several weak countries to below investment grade or “junk” – although critics has shown that rating agencies seems to overreactive since they cannot give proper warning before crisis exploded.

ASEAN for the Future

ASEAN is the most integrated regionalism in a developing world. It may not take EU as a role model for its economic development, but undeniably, eurozone crisis can give an insight how economic integration should be handled with care.

The main important lessson for ASEAN is that every economic integration should be started by efforts to reach same economic development in each member states. It is important such economic imbalance that happens in eurozone can be addressed in ASEAN. If ASEAN wants to deepen its integration, ASEAN must ensure all member states grow economically in the same pace and leave no country behind.

For now, economic imbalance among ASEAN member states may have little influence on ASEAN development. In ASEAN, trade with external partners of ASEAN is far more significant than intra-ASEAN trade so that ASEAN member states seem more vulnerable to shock in outside ASEAN rather than inside ASEAN. But, in the future, this condition will evolve as ASEAN will be more integrated. Sustainable growth in a region can only be achieved if all member states are in the same stage of development.

Learning from EU crisis, ASEAN should also create mechanism to ensure fast and proper response when crisis happens. The credibility for ASEAN is needed so that markets believe ASEAN can handle crisis well.

Arguing against globalization is like arguing against the laws of gravity. Economic integration is inevitable and trade agreement is necessary to make products competitive in global markets. But, the more integrated among countries, the more vulnerable each country to another’s internal problem. ASEAN, with the sense of community, should handle its integration carefully so that it can bring more goods that harm.

Rudi Winandoko is a diplomat at the Indonesian foreign ministry. This article, the edited version of which was previously published in The Jakarta Post and The Nation, is his own opinion.

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Posted by on 30 March 2012 in Diplomatologi


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