Economic Analysis of a Currency Union for East Asian Markets

This report analyzes the potential for a currency union among East Asian countries, including Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam, China, Japan, and South Korea. It explores the prerequisites for such a union, considering trade levels, symmetry of economic disturbances, and similarities in economic structures. The report discusses the costs and benefits, such as reduced transaction costs and increased investment, alongside the loss of monetary policy independence. It draws parallels with the European Monetary Union, outlining its structure and motivations for East Asian countries. Finally, it proposes policies for East Asian countries to adopt for a successful currency union, emphasizing economic policy coordination, fiscal discipline, and the establishment of central monetary authority, and a common currency.

Running head: EMERGING MARKETS
Emerging Markets
Name of the Student:
Name of the University:
Author Note

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Table of Contents
Prerequisites 2
Whether the East Asian Countries meet the requirements 3
The Costs and the benefit of forming a currency union 5
Benefits 5
Costs 5
How Europe made the designed the monetary union and how motivates East Asian
Countries 6
The policies to be adopted by the East Asian Countries 7
Reference 9

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Currency union is a contract between two or more countries to use the same currency
for transactions for both internal as well as external. There are three types of such unions that
are namely informal, formal and formal with all the countries in the union abiding by a set of
policies. There are several advantages and disadvantages to forming this type of union
between country based on their currency. Currency unions between countries help the
countries forming the union to reduce the risk of exchange rate. They also help them to
globalize as their businesses as the currencies are the same. Currency union between
countries to make easier transactions between them. This also reduces the fees that the
companies has to pay to the suppliers. The prices of different products across these countries
become more comparable as they are in the same currencies. There lesser chances for having
a crisis for currency. But there is a chance that the countries in the union to loose the
governance over their individual currency. There is also the chance that when there are faults
in the criterias for the union some of the countries in the union might be suffering while the
other countries in the union are enjoying good economic conditions. This study will examine
and discuss the formation of a currency union between the various East Asian countries.
Prerequisites
There are several prerequisites that have to exist for the countries to form a currency
union between them. They are discussed as follows:
Countries can achieve the greatest benefit from the currency union between them if
there is an existence of trade between them. The more these countries do trade among
themselves the more they will receive the benefit of the union in their currency. This type of
union reduces the cost of transaction that are made among the countries in the union
(Gächter, Gruber and Riedl, 2017). The amount of benefit these countries will receive also
depends on what type of trade these countries carry out most. If the trade is based on

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manufacturing of good then there is greater tendency of the countries for having the same
currency (Bagnai and Rieber 2019). Again the level to which the economy of a country is
open is also a factor to be considered for forming a currency union. The more the openness
the much likely the countries are to enjoy the benefits of a currency union.
There is a dependence on the level of symmetry of the disturbances that these
countries receive (Gachter, Gruber and Riedl 2017). If the countries have similar disturbance
in the trade, other things that affect trade and also the way these countries treat these
disturbances then the countries will benefit more by forming a currency union. If there are not
much difference in these disturbances then it might be good to have difference in the national
policies of the countries. The countries may reduce level of independence in designing their
national policies.
There is also a prerequisite that the countries forming the currency union must be
having similar structure of their economy. The countries that have a similar structure of their
economy and then when they form a currency union they get benefitted the most. Similarity
in the structure of the industries, financial market and businesses are one of the main
prerequisites for forming a currency union.
Whether the East Asian Countries meet the requirements
The trade among East Asian countries is very high. The exports and imports among
the East Asian countries is high (Baglioni, Boitani and Bordignon 2016). At some parts of
the region the trade among themselves is higher than that of Europe. Most of the East Asian
have high share in the exports in their intra trade is quite high except for some countries like
Myanmar, Lao and Brunei. Among these countries Brunei has achieved the biggest share
percentage. But for the import shares Lao, Hong Kong and Myanmar have achieved the
biggest percentage of the share(Baglioni, Boitani and Bordignon 2016). The countries like
Indonesia, Brunei, Malaysia and Singapore are the biggest sources for importing. China is the

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largest supplier for China. It has been found that the intra trade between the East Asian
countries are quite high. So, the East Asian countries meet this prerequisite.
There is a high correlation between Malaysia and Thailand. The supply shocks that
occur in Japan is closely correlated with the countries in this region. But the supply shocks
are not much related with the countries like Hong Kong and Malaysia(Gachter, Gruber and
Riedl 2017). But Japan and Malaysia does have a good level of correlation in their
disturbances. The countries like Japan, Indonesia, Thailand, Korea, Malaysia and Hong Kong
have a high level of symmetry in their manufacturing. But Hong Kong is based more on the
service sector than in the manufacturing. Most of these countries have high share in their
manufacturing of goods and exporting them. Indonesia has a huge share in the export of oil to
other countries which is a raw material for the manufacturing processes. But china does not
have any level of relation.
The economic structure of Brunei and Myanmar are not much same to the economic
structure of the other East Asian countries since they are not at the same level of economic
development. It has been found that the 12 East Asian countries that are namely Singapore,
China, Taiwan Indonesia, Korea, Hong Kong, Japan, Korea, Malaysia, Brunei, Myanmar,
Philippines, China and Thailand have high similarities in their economic structure. The
industry structure of these countries are also very similar. All these countries have industries
based on agriculture and fishing. The mining industry in this area is also booming. These
countries also have high correlation based on their financial markets and real estate business.
The Costs and the benefit of forming a currency union
The various cost and benefits of forming a currency union in the East Asian is
discussed as follows:
Benefits
One of the main benefits of having a currency union in the East Asian Countries is
that it can help to reduce the transaction costs (Tischbirek 2018). There will is lower

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exchanges in the currency. There is also an increase in the savings in the member countries
because the transaction costs are lower. Also as the cost of exporting the goods from an
individual country decreases so the businesses in the country can grow better.
Investment of the member countries also increases because of the lowering of the
costs of transaction (Sinn 2016). The foreign direct investment in the member countries also
increases as a result of the lower costs of transaction. The financial markets mainly the
money market of the member countries also become very strong.
The stability of the currency also increases. This stability in the currency also
enhances the profitability of the member countries (Arif and Shabbir 2019). The stability and
the same currency also helps to increase the comparability of the price of different goods and
services within the member countries.
The workers of the member countries can move without any restraints. This helps to
reduce the level of inflation and the increase employment in the member countries.
Costs
The countries forming the union have to give up their independence on the monetary
policy (Andersen 2016). The head that has control over the union of the member countries
will now be designing the monetary policies for all the countries.
Since the inflation of the countries gets reduced and the costs of transaction also
reduces so when the distinct asymmetric shocks occur and the countries are unable to provide
appropriate response then losses are made (Larch 2017).
When there is such a large change in the fiscal policy the demand for savings
increases. This increase in the savings in the member countries interest rate in the long term.
How Europe made the designed the monetary union and how motivates East Asian
Countries
The economic and monetary union was implemented in the year 1992. It was a major
step that integrated the European companies. Economic and monetary union also made an

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integration of the various economic and fiscal policies and produce a common policy and
currency for its member nations. Some of the countries just follow the same economic
policies after the economic and monetary union but some have also made euro their home
currency. The certain terms of the economic and monetary union were as follows:
The member countries will have the same economic policies(Andersen 2016). The
union will decide on the fiscal policies of the individual nations by fixing the percentage of
Debt and the Deficit(Andersen 2016). There will be a monetary policy that will be followed
by all the member countries. This monetary policy will be set by the European Central Bank
(ECB).The rules and regulations of the financial institutions will be the same(Larch 2017).
The currency of the member countries will be the same(Andersen 2016). But there is not just
one organization that will decide on the economic policy. The separation of duties is as
follows:
The European council will decide on the orientation of the policies.The economic
policies and the decision for the adoption of the Euro is made by the council.The policies of
the interests that are common for the member countries will be made by the Euro
Group(Andersen 2016).The member countries may design their budgets but within
restrictions on Debt and deficit.The performance of the individual countries is supervised by
the European Commission.The monetary policies and the supervision of the stability in the
price is done by the European Central Bank(Larch 2017).The designing of the legislation and
the governance on the economy is made by the European parliament(Larch 2017). There
were several benefits of the European currency exchange that motivated the East Asian
countries for using a single currency. The fluctuations in the currency value got reduced to
zero. The cost of transaction between the European countries became almost equal to null.
The price of the goods and services became more transparent across the European continent.

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The policies to be adopted by the East Asian Countries
There are several policies that the East Asian countries have to adopt to take full
benefit of the monetary union. Firstly there must be coordination of the economic policies of
the member countries(Arif and Shabbir 2019). Then the fiscal policies of the governments of
the member countries must be limited on the basis of Debt and deficit. A central bank must
be formed that will make the monetary policies for the member nation. Same monetary policy
has to be followed. The union of the countries must also decide on the currency that will be
used throughout the countries(Arif and Shabbir 2019). A council must be formed that will
have responsibilities like setting the orientation of the policies, make the economic policies
that has to be followed across all the member countries(Arif and Shabbir 2019). There must
be a body that will decide on the common interest of the East Asian countries. A commission
must be formed that will be responsible for monitoring the performance of the member
countries(Arif and Shabbir 2019). A budget for each of the individual countries will be made
but it must be restricted on the basis of the amount of Debt and deficit. This restriction on the
debt and deficit must be set by a separate body.
This study concludes that East Asian Countries must go for the currency union as they
in some part they meet the prerequisites for the union even more than the limit to which the
European countries met the prerequisites before the European Monetary Union. There were
several benefit that the European countries received. The prices of the good became stable
throughout Europe. The currency union also generated new business opportunities and also
provided security. There was improvement in the stability in the economy of the European
countries. The integration in the financial markets has also increased after the implementation
of the currency union. The European Union became one of the most strongest factors for
determination of global economy. The benefits of the currency union between the East Asian
countries are more than the costs that will be incurred. The increase in the investments is one

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of the biggest benefit from the currency union. This will help the small companies in the East
Asian area to reach the global levels. East Asian countries can use the European Currency
union as an example and develop the union in a similar manner. A parliament must be formed
that will be the main head for making the decisions regarding the policies. The parliament
will be making the policies for the council and will also supervise all the economic policies of
the member countries with the help of the new policies.

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Reference
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Nature of Scandinavian Central Banking (pp. 81-93). Palgrave Macmillan, Cham.
Arif, A. and Shabbir, M.S., 2019. Common currency for Islamic countries: is it
viable?. Transnational Corporations Review, 11(3), pp.222-234.
Baglioni, A., Boitani, A. and Bordignon, M., 2016. Labor mobility and fiscal policy in a
currency union. FinanzArchiv: Public Finance Analysis, 72(4), pp.371-406.
Bagnai, A. and Rieber, A., 2019. Killing two birds with one currency: Income and fiscal
policies in a growth model of a currency union. Journal of Post Keynesian Economics, 42(2),
pp.274-298.
Gachter, M., Gruber, A. and Riedl, A., 2017. Wage Divergence, Business Cycle Co-
Movement and the Currency Union Effect. J. Common Mkt. Stud., 55, p.1322.
Gächter, M., Gruber, A. and Riedl, A., 2017. Wage divergence, business cycle co‐movement
and the currency union effect. JCMS: Journal of Common Market Studies, 55(6), pp.1322-
1342.
Larch, M., Wanner, J., Yotov, Y. and Zylkin, T., 2017. The currency union effect: A PPML
re-assessment with high-dimensional fixed effects.
Sinn, H.W., 2016. a Brexit lesson: Is a Single currency not Worth the Gamble?. The
International Economy, 30(3), p.42.
Tischbirek, A., 2018. Large-scale bond purchases in a currency union with segmentation in
the market for government debt. Journal of Economic Dynamics and Control, 95, pp.37-69.