European and Asian Integration: Achievements and Challenges

III. Economic Outlook and Risks

Naturally, Asia will be affected by the projected slowdown in global growth. Yet it appears that our region’s economic expansion in 2008 will remain robust, perhaps a percentage point or less below the 2007 growth of around 8.5%. In fact, many economists are hoping that the US slowdown will help China ensure its economy avoids overheating. So far, Asian exports remain robust, primarily due to intraregional trade and continued demand, especially from emerging economies worldwide. Domestic demand within our region is also on the upswing.

In terms of risks, the big worry around the region is that inflation, mostly from high food and energy costs, but also from continued capital flows, will limit policy options for monetary authorities. Global financial volatility is always a significant concern, although the region had limited and apparently quite controllable exposure thus far to the US subprime crisis.

There has been a lot of talk about decoupling lately. To us, that is neither here nor there. In past US recessions, the drop in economic growth in Asia largely mimicked that in the US. We would expect that to continue to a certain extent. But with Asia’s internal dynamic changing, the effect should be lessened.

Although we still believe the US can avoid an all-out recession, we will be watching very carefully for any indication that the slowdown accelerates to a sharper-than-expected recession in the United States or leads to a significant slowdown of the global economy. In any case, it is clear that the Asia and Pacific region needs to assess policy options and continue needed reforms to further enhance our region’s financial stability and bolster macroeconomic interdependence.

IV. Financial Stability in Asia

One lesson of the Asian financial crisis was that, with the natural integration that globalization brings to markets, greater regional cooperation is mandatory. It is necessary to prevent crisis, promote financial reform, enhance monetary and exchange rate stability, build new institutions, and improve physical, capital, and human interconnectivity. The crisis, if anything was a trigger for Asian regionalism.

While there have been widespread reforms over the past decade, Asia remains much more integrated in trade than in finance. It is much less integrated overall than Europe, especially in finance. However, Asian leaders have made regional financial integration a priority-in part as a safeguard against the vagaries of global markets, but also as a platform for regional development. Major initiatives since the crisis include the ASEAN’s surveillance process, the Chiang Mai Initiative and the Asian Bond Market Initiative (ABMI)-both launched by ASEAN+3-and the Asian Bond Fund initiative promoted by the Executives’ Meetings of East Asia-Pacific Central Banks, or EMEAP. Still, regional financial integration remains at an early stage. In many ways, Asia is more financially integrated with the global economy than with itself.

Where do we see regional financial cooperation moving in the medium term? There are four concrete directions. The first is continued strengthening of local currency bond markets-as an alternative to dominant bank financing, a means of translating savings into productive investment for both institutional and small investors, and a way of financing infrastructure through innovative, market-sensitive instruments.

Second is greater harmonization of financial systems in response to private sector demands for trade finance and cross-border intraregional investment.

Third is to establish a minimum set of standards, or best practices, that all recognize and strive to follow.

And fourth, to help foster the first three, the creation of a top-level financial stability dialogue, forum, or roundtable to bolster financial stability through enhanced cooperation between finance ministries, central banks, and market regulators in the region. This can also become an important high-level venue to guide macroeconomic cooperation, to build on existing ASEAN+3 Economic Review and Policy Dialogues.