8 - The Euro and East Asian Monetary Co-operation

Summary

The launch of the euro in 1999 generated great interest within Asia. To Asians, the euro is not just a single currency of the European Union (EU) and a milestone of EU's integration. More importantly, many Asians see the euro as a potential stabilizer in the international economic system and are concerned about the impact of the euro on EU-Asia economic and trade relations. Many also believed that the euro as a symbol of EU's success story of integration would have a stimulating effect on their own regional co-operation. This paper specifically examines this latter point — if and how the launch of the euro would impact East Asian regionalism and more specifically, the prospect of East Asian monetary integration in the foreseeable future.

The Euro Effect in East Asian Regionalism

Generally speaking, East Asians were not as skeptical as Americans when the EU embarked on the final stage of its European Monetary Union with the launch of a single currency, the euro. East Asians welcomed the euro basically because of two reasons: the first is that it would be more convenient and efficient for them to do business and travel around the EU countries with a single unified currency; the second is the hope that the euro backed by EU's economic size and strength would eventually become an alternative choice of international currency vis-à-vis the U.S. dollar. This would also allow the East Asians to diversify their reserve currencies presently held primarily in U.S. dollars.

Such desire was clearly reflected in the Chinese Government's announcement, just before the euro became a tangible commodity, that it would increase the share of the euro in its foreign exchange reserve. In China, there was a strong belief in the success of the euro even before its physical launch. There was also a strong feeling that East Asia would benefit from the success of the euro. Since 1998, EU-China trade has increased rapidly.