COMMON CURRENCY: MYTH AND REALITY
Jan 31 - Feb 6, 2011
The birth of Euro was conceptualized by two economic imperatives ñ the need to reconstruct Europe that stood devastated by the two Great Wars, and the need to develop a mechanism to safeguard Europe from the onslaught of US dollar which, backed by the unchallengeable US military might, appeared set to take European economy for granted.
Earlier, the US had used European countries en bloc to tame the Japanese yen. The European countries were quick to realize that it was the US dollar and not the Japanese yen that posed real threat to their economic survival. US could not afford the inclusion of UK in the covert European alliance against its dollar. Well before first January 1999 - the date of euro's introduction to world financial markets - the UK withdrawal from the ERM (European Exchange Rate Mechanism) on September 16, 1992 bore an imprint of US pressure. The US was entitled to exert moral as well as economic pressure on its World War II ally for which it had done a lot when the chips were really down for the British.
Seventeen European nations have adopted the common currency euro and the system is doing fine with a few off and on hiccups. Some problems arose when certain member countries ñ like Greece, Ireland, Portugal etc ñ failed to exercise fiscal and monetary discipline and fell prey to debt crises.
By June 2008, euro had a circulation volume of 800 billion in the international money market, second after the US$. World nations' trust in euro as a reserve money has grown with the passing years. Currently, around 27 per cent of world exchange reserves are held in euro. The success story of euro owes much to the political maturity of the euro zone as well as strict financial discipline at the European Central Bank.
In this background, the talk of a SAARC common currency looks like a pipedream to the world analysts. On the face of it, they are not much off the mark. To begin with, the limited scope of SAARC, with only eight countries on its membership list ñ fewer than the number of neutral observers ñ with starkly heterogeneous economies ranging from very small to substantially large and from very weak to robust , fully entitles it to qualify as a doubtful starter. Leaving aside the 'also ran' members - Nepal, Bhutan and Maldives - the polygon of India, Pakistan, Bangladesh, Sri Lanka and the late entry Afghanistan can not be trusted to strike the political balance required to forge purposeful alliances. They all have political grudges against one another. With the history of discords extending over decades, they appear well prepared to forego economic gains to maintain their positions of hardened dislike for each other. With the exception of India, the outside world views all seven nations as either a drag on world exchequer or a flashpoint worthy of global concern.
The developed nation's interest in SAARC countries reaching any economic collaboration of consequence will be minimal if it doesn't affect them in any way. The SAARC decision to pursue a common currency program is certainly going to affect them, particularly the US and the West, in more than one way. While they might not like India to be part of any such programs, they may take the move as a goad to Arab oil nations that have been longing for a change in the transaction-currency system governing oil deals.
India also might not like to condescend ñ it being a far larger economy - to the wishes of the smaller economies until and unless the deal is such structured as to promise huge advantage to India itself. And, if the deal is structured in a way that gives huge advantage to India, Pakistan (and may be Sri Lanka and Bangladesh) would stand up to block it.
The euro success story was not written in vacuum. In addition to the political will of Europeans, there was a systemic and methodical approach to the entire issue. The signing of Maastricht Treaty in February 1992 was a landmark event that helped to create the pillar structure of European Union. The treaty required of the applicant country to:
* Have budget deficit less than 3 per cent of GDP
* Have public debt to GDP ratio below 60 per cent
* Have an inflation rate not more than 1.5 per cent over and above the average of the three lowest-inflation countries
* Have long-term interest rates not more than two percentage points in excess of the rates in the three best-performing countries.
* Have no record of currency devaluation during the last two years
Assuming a similar criteria is evolved to qualify for benefitting from a common currency regime, the existing economic indicators of Pakistan would make it impossible for it to win membership. Moreover, the intra-association trade volume is not very significant to evoke real interest in creating any such arrangement. According to the secretary general, Chamber of Commerce and Industry SAARC, the dream of a common SAARC currency cannot be realized even during the next 20 years. He said that under SAFTA (South Asian Free Trade Agreement) the trade volume of SAARC countries was a meager $682 million. Moreover, their mutual trade under bilateral agreements amounted to $12 billion, which is less than five per cent of their trade carried out with the rest of the world.
Several studies have been carried out to explore possibilities of a common SAARC currency. The abstract of a study by T Gopinath suggests:
"In the paper entitled 'A Common Currency for SAARC: Is it feasible or a pipedream', an endeavor is made to examine the suitability of SAARC for a suitable currency on the basis of three criteria viz., intensity of trade, shock symmetry and homogeneity of economies. The study revealed that SAARC is ill suited for a common currency as the extent of trade is extremely low. There are compelling economic reasons against a common currency".
Another study by Anup Chaudhury, Suman Paul Chadhury and Shamim Ehsanul Haque, of BRAC Business School, Bangladesh concludes:
"Hence right at the moment, SAARC countries have to improve their relationships and attitudes towards each other and they need to take initiatives to eliminate the existing conflicts among them. In order to introduce a common currency in the region, economical homogeneity is the prime factor, which has some deficiencies in the SAARC countries. Any move towards introducing a common currency, for SAARC countries in recent time will not be viable unless a good neighborly and economic homogeneity in the region is achieved".
In the existing structure of SAARC, Pakistan is precariously placed. With a fully-fledged adversary in India and two "not so friendly nations" like Bangladesh and Afghanistan, the balance seems to be tilted against it. Pakistan will have to wait till such time the balance gets shifted in its favor with the prospective inclusion of China in SAARC. Only then the idea of a common SAARC currency could be taken seriously by the outside world and the SAARC members themselves. Until then, Pakistan will do well to focus on its economy to give it a semblance of respectability.