Introduction
1. Thank you, Mr. Garnier. It is my honor and privilege to participate in this conference and join this panel of distinguished experts this afternoon to discuss implications of the euro and the Eurozone after the crisis on the international monetary system.
2. Distinguished guests, ladies and gentlemen, while we all recognize that no crisis is the same, history shows time and again that countries in different parts of the world frequently followed similar mistakes that others did previously. So I believe that it is crucial to remind ourselves of lessons learned, and at least, try to make sure that we do not follow the same mistakes elsewhere. In this regards, Asia also has a lot to learn from the Europe on top of our own painful difficulties a decade earlier. The points I would like to draw your attention to today are therefore the major lessons that people in this part of the world can take from the recent European experience. Also, I would like to touch upon one important issue in terms of the important role of regional financial safety net and discuss the enhanced efforts in the ASEAN+3 region.
3. The outline of my presentation today is as follows: First, I provide my views about the euro and Eurozone after the crisis. Second, I will discuss keys to the IMS reforms from the European lessons. And then I will focus on the role of regional financial safety net and the ASEAN+3 efforts on this front.
The euro and Eurozone After the Crisis
4. It is a positive and encouraging development to the global economy that the destabilizing cycle between sovereign debt and banking crisis in the Eurozone has been gradually tempered. Thanks to the continued efforts on various fronts including enhanced collective surveillance and crisis management, bank capitalization, central bank support (OMT and LTRO), and structural reforms to boost competitiveness, the Eurozone has finally emerged from recession in second half of 2013 and is expected to register some positive growth in 2014.
5. Notwithstanding, high unemployment and debt levels, low investment, persistent output gaps and the resultant very low inflation, tight credit, and financial fragmentation in the Eurozone will likely continue to weigh on the recovery. So we view that although the recovery will gather a momentum, it will be a relatively fragile one.
6. Downside risks in the medium term from the possibility of incomplete reforms on the banking and fiscal unions as well as structural reforms in the real sector, and continued low inflation are sizeable. Given this conjecture of growth and surrounding risks, the role of the euro as a reserve and an additional anchor for international monetary stability may increase quite gradually in the nearand medium-term.
7. Although the global recovery has been on a firmer footing and downside risks have subsided, the above scenario about the euro and the Eurozone and the shortcomings of the current state of the IMS discussed in the previous session indicate that we will continue to be in the global economic and financial environment with uncertainty and potentially recurring destabilizing shocks.
Keys to the IMS Reforms From the European Lessons
8. There are three areas of works and cooperation that need to be strengthened in the efforts to further reform the IMS: assessments of risks and surveillance, financial safety net, and international cooperation.
9. First, on the assessments of risks and surveillance, mispricing of risks coupled with declining competitiveness was the key inducing factor of rising imbalances and led to an occurrence of crisis. Moreover, increased integration has made spillovers larger and faster. Hence, it is important to be able to better identify sources of risks, understand linkages and closely monitor and assess associated symptoms.
10. Second, amid the environment of high uncertainty and large capital flow fluctuations, adequate financial safety net has proven to be crucial in buffering shocks apart from appropriate macroeconomic management and policy mix.
11. From the cooperation between the European facilities and the IMF, we also learned that: First, the amount of financing need could potentially exceed those readily available at the global institution. Second, while the European facilities relied more on the funding from Europe than the IMF, they collaborated with the IMF and leveraged on the IMF’s expertise on surveillance and program design.
12. Therefore, given the multiple layers of safety nets against potential or actual, one very important issue that needs to be figured out is how the different layers of safety net should interact/coordinate with each other, in order to effectively cope with crises, while preventing moral hazard. So this includes not only the interactions between the global and regional safety nets but also the cooperation between regional and bilateral defense mechanism which is critically important given the significant role that bilateral swap arrangements could play in this part of the globe.
13. In addition, there are also other questions that need to be further addressed such as “what should be done in peace time, in order to ensure smooth coordination in crisis time?”, and “should the coordination mechanism differ depending on whether the objective is crisis resolution or crisis prevention?”
14. Third, mutual efforts have not been significant in helping to reduce adverse international spillovers of domestic policy from major economies. That said, that increasing voice and representation of emerging and developing economies continue to be an unresolved challenge at the IMF.
Role of Regional Financial Safety Net and the ASEAN+3 Efforts
15. Now please allow me to elaborate on the efforts in ASEAN+3 on a regional financial safety net, to fill in the gap and complement the efforts at domestic and global levels. The Chiang Mai Initiative Multilateralisation, or CMIM, is a multilateral currency swap arrangement that evolved from a series of bilateral swaps among ASEAN+3 economies. CMIM’s core objectives are to address balance of payments and short-term liquidity difficulties in the region, and to supplement existing international financial arrangements such as those of the IMF. CMIM members include Ministries of Finance and Central Banks of the ten ASEAN countries, China, Japan and Korea plus the Hong Kong Monetary Authority.
16. CMIM became effective in March 2010 with an initial agreed size of US$120 billion, which members agreed to double to US$240 billion in 2012. As we came to recognise that even an economy with good fundamentals and sound macroeconomic management can face sudden difficulties, ASEAN+3 members also agreed to introduce a crisis prevention facility called the “CMIM Precautionary Line (CMIM-PL)”. These enhancements to CMIM are in the process of formal ratification within each ASEAN+3 economy.
17. Our office, the ASEAN+3 Macroeconomic Research Office or AMRO, was established in 2011 in Singapore as a surveillance unit of the CMIM. Our objectives are to monitor and analyse regional economies and to contribute to early detection of risks, and to support swift implementation of remedial actions and effective decisionmaking of the CMIM. While AMRO supports the co-chairs of the ASEAN+3 Finance Ministers and central bank governors’ process in the CMIM matters, at present AMRO is not the official secretariat of the CMIM. Therefore, currently we are not in a position to officially explain the current content of the CMIM agreement, and to represent the views of the CMIM members.
18. As a relatively new institution with a challenging mandate, there are immediate tasks that AMRO needs to accomplish amid a fast changing environment. First, we are working hard to enhance the effectiveness of our surveillance activities, especially on financial sector stability and capital flows so that we would be able to detect the problems early on. With the introduction of the crisis prevention function to the CMIM, we are building relevant surveillance capacity in specific areas of macroeconomic policy management, including in Fiscal Policy, Monetary Policy, External Position and Market Access, and Financial Sector Soundness and Supervision. We believe with our focus on intra-regional economic activities and the implications for monetary and financial stability in our region, we can complement the work of IFIs such as the IMF.
19. Second, AMRO plans to enhance collaboration with other IFIs to improve our institutional capacity. So far we have established cooperation with IMF, ADB, World Bank and BIS through capacity building and exchanges of views on macroeconomic developments. Efforts in the pipeline include joint research that would leverage on the expertise of different institutions, as well as further capacity building. Nevertheless, to ensure the integrity and independence of AMRO’s surveillance assessments, this will be undertaken in a step-by-step and measured way, under the guidance of our members.
20. We believe that these endeavors will raise AMRO’s capacity to effectively support the CMIM, and thereby make an important contribution to building regional financial safety nets in our region. I would like to end my discussion here, and I thank you for your attention.