>TRENDS & PROSPECTS IN LIGHT OF THE FINANCIAL CRISIS (DEUTSCHE BANK)

EMU(ECONOMIC & MONETARY UNION): A Role Model for an Asian Monetary Union?

> Some euro lessons for East Asia
> Aims and prerequisites for AMU
> Milestones on road to AMU: Food for Thought
> AMU, financial crisis and global monetary system

Some euro lessons for East Asia

■ The euro celebrated its 10th anniversary on Jan 1, 2009 Main message: The euro has been a success story so far. The main features of its success have been

• Low inflation rates (1999-2008 annual avg. 2.1%)
• Relatively low (real) interest rates
• Boost to trade and FDI
• Catalyst for financial market integration
• Growing international role as trade, investment and reserve currency behind the dollar

■ While EMU has fulfilled many expectations it also has a mixed record and has brought some disappointments. Mixed performance regarding fiscal discipline

• Incentive to consolidate in order to qualify for EMU

• Stability and Growth Pact (SGP) proved its worth in good times but substantial problems when growth has been weak (2002-05; 2009-?)

• Reform of the SGP in 2005 was positive

–Strengthening of the preventive arm(focus on fiscal consolidation in good times, 0.5% of GDP p.a.)

–Greater flexibility of the corrective arm(e.g. longer adjustment period to correct an excessive budget deficit)

• Political will is, however, essential!

■ Main disappointments of EMU: growth and enlargement

Aims and prerequisites for AMU

■ AMU objectives likely to be similar to those of EMU

• Asean objectives specified but not yet AMU objectives. The former likely to be key for AMU: growth, social progress, regional peace, stability

• New Asean treaty needed to lay down aims and prerequisites for joining

• The statute of the ECB could serve as a blueprint for a common central bank in AMU:Priority to price stability (precondition for sustainable growth), independence, ban on financing budget deficits

• Other objectives for an AMU central bank: 1. Support for growth (if price stability is given); 2. key role in securing financial market stability (following experience of financial crisis; potential problem: moral hazard!)

• Ensuring fiscal disciplinein order to avoid an overstretching of the common monetary policy resulting from too lax (national) fiscal policies (Asian SGP!)

To see full report: EMU