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Lessons Learned from the European Union (EU) Debt Crisis to the ASEAN Economic Community (AEC) Isawan Kaeochotchuangkul, Thamon Benjapongsapun and Veeris Ammarapala* With the rise of ASEAN Economic Community (AEC) in 2015, ASEAN will be perceived as a single market allowing free flow of goods, services, investment, capital, and skilled labors. This clear objective of the integration is rather similar to the European Union (EU) formation, which also initially started from the integration of economic community. Even though the EU had been considering as one of the leaders in world’s economy for decades, the region’s financial crisis has recently been revealed and remained unsolvable. This paper extensively examines the key factors that were the root causes of current European Union Crisis. Then, the authors compare situations between the emergence of ASEAN Economic Community and the development of European Union to find the traits of similarities. The findings of this analysis could be considered as policy recommendations to AEC policy makers in order to keep the AEC away from the foreseeable economic pitfalls. Keywords: Economic Integration, European Union, ASEAN Economic Community 1. Introduction 1.1. European Union Background In the year of 1951, six European countries; France, Germany, Italy, Belgium, Luxembourg and the Netherlands, was cooperatively formed the first European Community under the name of the European Coal and Steel Community (ECSC). Other than to organize the two key economic indicator resources, the organization also aimed to maintain political stability and ensure lasting peace among European countries, especially between the main polar after World War II, which were France and Germany (Europa, 2010). Officially, this was the first milestone of free movement of products without customs duties and free access to sources of coal and steel production amongst the European nations. Afterward, in 1957, there were many initiations in attempt to establish greater collaboration leading to the European Union (EU) formation, i.e., the establishment of European Economic Community (EEC), which aimed to achieve the international trade integration in a viewpoint of economic expansion (Europa, 2010); the Common Agricultural Policy (CAP), which targeted to mutually create food security for Europe and supported European farmer by a fair income, according to Economicsonline; and The European Monetary System (EMS) in 1979, which significantly contributed. _______________________________ [email protected], [email protected], [email protected] * School of Management Technology, Sirindhorn International Institute of Technology Thammasat University, * corresponding author 1 Then, in 1979, the emergence of European Monetary System (EMS) has significant contribution to the establishment of EURO currency by starting to maintain the member states’ currency within the acceptable exchange rate limit (EU Facts, 2012). The EURO currency adoption came into practice in the year of 1992 under the treaty of European Union. By deepening the integration among many European countries in many aspects throughout its history, together with increasing the number of member states from time to time, EU became one of the strongest leaders in the world’s economy with a huge bargaining power and was be able to maintain its prosperity. Nevertheless, the unexpected situation was revealed in January 2010 when EU report condemns “severe irregularities” in Greeks accounting procedure (The Federal Reserve Bank of Minneapolis, 2012). 1.2. ASEAN Economic Community Background In 1967, the Association of South East Asian Nations, ASEAN, was established by the Bangkok Declaration in order to establish collaboration and inter-relational benefits in the region. This is the beginning point that many countries put away their conflicts and considered regional union as mutual benefits. The five founders of this cooperation were Indonesia, Malaysia, Philippines, Singapore, and Thailand. Then, in 1999, all ten member countries in the region joined to be the ASEAN community. ASEAN Economic Community is one of the three pillars established by ASEAN community in 2003; where Socio-Cultural Pillar and Political and Security Pillar are the others (Association of Southeast Asian Nations, 2009). 2. Current Issues From European Union Crisis 2.1. Currency European Monetary Union is the economic integration to strengthen the single market concept among EU member states with the objective of achieving a single monetary policy and a single currency, the Euro (European Commission, 2012). However, this idea had not been successfully achieved until 1992, when the Maastricht Treaty set out the rules and guidelines for each member country to adopt the Euro. Currently, according to The Euro Information website, 17 EU countries have utilized the same currency, the rest; i.e., The United Kingdom, Sweden and Denmark still employ its own national currency. A single currency enhances low and stable inflation, stability in exchange rate and healthy public finances among EU members. However, in 2009, Greece reported its debt with 113% of its GDP; which in fact exceeded and doubled the 60% of the GDP limited by Euro zone (BBC News, 2012). In 2010, Portugal, Ireland and Spain raised concerns that they have been facing with the financial crisis situation. In order to assist the member countries from this situation, the EU finance ministers set up “European Stability Mechanism” to assist those countries. 2 One of the main causes of this financial crisis, for which the research team discovered, may result from the high discrepancies of currency exchange rates between member countries currency and the Euro; as depicted in table 1 below. This diversity is a result of countries with different economic background and growth came together to form a single union. As time went by, each country, with these cultural and ability differences, had diminishing flexibilities in terms of government’s financial management. For example, Greece is the nation that relies mostly on service industries, especially tourism sector. When the world economy went wrong, there were less tourists going to Greece, which, in turn, lower their GDP in service sector, especially in the Tourism. As a result, Greece was put into a difficult situation to repay their debts. On the other hand, if Greece did not commit to use the Euro, it might be easier for them to devaluate their currency, which could generate more exports and attract more travelers. Table 1: Original Country’s Currency compared to Euro (Source: Ibiblio, 2007) Exchange Rate 13.7603 40.3399 1.95583 5.94573 6.55957 0.787564 1936.27 1 EURO = 40.3399 2.20371 200.482 166.386 340.75 15.6466 239.64 0.585274 0.4293 30.126 Country Austria Belgium Germany Finland France Monaco Ireland Italy San Marino Vatican City Luxembourg Netherlands Portugal Spain Greece Estonia Slovenia Cyprus Malta Slovakia Although, the EU integration has been trusted for its strong collaboration and countries that use Euro have gained more credits from financial institutions, it should be considered carefully whether EU’s monetary integration could provide greater benefits to its member states. 3 2.2. Free Flow of Labor Free flow of labor across countries is one fundamental benefit of being the membership of European Union (Eurofound, 2011). Though the free flow of labor could minimize or put the overall unemployment rates in EU to be at the steady level, when the economic crisis taking places, higher unemployment has been experienced in every member state. Developed countries have to protect their own working position for their own people so they impose certain working restrictions on those countries that have become EU members after 1995, which were the 10 former communist countries that joined in 2004 and the last 2 countries that joined in 2007 (BBC News, 2009). Some of the restriction examples are as follows (BBC News, 2009): Austria and Germany stated that those 12 new member states have to apply for work permits in order to work in their countries. Belgium has increased its existing restriction from what it has imposed before. The Netherlands has raised all of restrictions for those 12 countries and a work permit will be issued only when there are no suitable workers available in Netherlands. Though Sweden, United Kingdom and Republic of Ireland had opened up their labor markets to all new member states, with a large amount of labor flooded into their countries, some restrictions then have been introduced; for example, they imposed restriction on the amount of workers allowed from Bulgaria and Romania – the last 2 countries accepted into EU. 2.3. National Government Budgeting Policy According to the Maastricht Treaty, one of the eligible criteria for becoming the EU members is that the ratio of the annual government deficit to Gross Domestic Product (GDP) must not exceed 3% at the end of the preceding fiscal year (Europa, 2012). Even though there would be the exceptional case for temporary mismatch situation, in Table 2, the statistics showed the continuous budget deficiencies in many member states (Eurostat, 2011). After the member states in European Union became borderless, there was evidence that many small-size economy countries started to run budget deficit policy to support their national infrastructures and to improve national standards of living by initiating various public interest programs. For instance, The increase in the Greece’s deficit in 2008 was mainly related to accounts payable of social security funds, the increase in the Austria’s deficit from 2007 to 2009 was due to assumption of debt of the railway company and public hospitals, and the increase in the Slovenia’s deficit in 2009 was mainly due to updated source data relating to taxes and subsidies among others. Mostly, the source of fund came from the member states whose economy size were larger and more stable; i.e., Germany and France (The New York Times, 2011). Nevertheless, the funding was not supported by only big countries, but also from many members in the union. As a result, if one country faces a financial problem, the effect will certainly expand 4 throughout the community because the investment network amongst member countries has been set. Table 2: Comparison Table shows Average in EU Deficit and Surplus from 20072010 (Source: Eurostat, 2011) 2007 2008 2009 2010 (million euro) 9,035,939 9,264,270 8,970,953 9,240,316 (million euro) -60,082 -188,988 -566,680 -550,481 (% of GDP) -0.7 -2.0 -6.3 -6.0 Government expenditure (% of GDP) 45.9 46.9 50.8 50.4 Government revenue (% of GDP) 45.2 44.8 44.5 44.4 Government debt (million euro) 5,984,848 6,472,881 7,116,276 7,837,207 66.2 69.9 79.3 85.1 (million euro) 12,398,526 12,494,352 11,788,046 12,280,644 (million euro) -108,011 -296,010 -803,807 -784,107 (% of GDP) -0.9 -2.4 -6.8 -6.4 Government expenditure (% of GDP) 45.6 46.9 50.8 50.3 Government revenue (% of GDP) 44.8 44.6 44.0 44.0 Government debt (million euro) 7,310,759 7,782,775 8,768,748 9,828,232 59.0 62.3 74.4 80.0 Euro Area(EA17) GDP market price (mp) Government deficit(-) surplus (+) (% of GDP) EU27 GDP market price (mp) Government deficit(-) surplus (+) (% of GDP) Figure 1: Government Deficit and Surplus from 1999-2011 (Source: BBC News, 2012) 5 Figure 2: Member State’s share in the Bank’s capital based on its economic weight (expressed in GDP) in 2010 (Source: European Investment Bank, 2010) 2.4. Small and Medium Enterprises With many treaties and collaborations behind the integration of the EU, SMEs business owners should find it is rather convenient to conduct businesses in various member states. The barriers to perform business activities were to be eliminated and the efficient single market was to be formed. However, according to surveys conducted on SMEs business owners among 27 EU member states by the European Commission in 2007, 9 main obstacles were detected as shown in Table 3 (The Eurobarometer Team of European Commission, 2007). 6 Table 3: Nine Barrier Factors of EU SMEs with Percentage (The Eurobarometer Team of European Commission, 2007) Barrier Factors of EU SMEs 1. 2. 3. 4. 5. 6. 7. 8. 9. Lack of Customer’s Purchasing Power Administrative Regulations Lack of Skilled Labor Highly Expensive Labor Forces Infrastructure Problems Limited Access to Finance New Technology Implementation Implementing New Form of Organization Lack of Quality Management Percentage of Survey Respondents 46% 36% 35% 33% 23% 21% 16% 16% 11% After examining all of the above information, it can be concluded that there are a number of several complicated regulatory systems and the technologies that are hard to be implemented and the costs that are relatively high. Even though there are public support programs available to support the European SMEs; for instance, Competitiveness and Innovation Framework Program (CIP), which aims to support innovation activities and provides better access to finance and delivers business support services in the regions, European Investment Bank which offers funds for SMEs among others (EU Business, 2009), many SMEs do not know that there are useful information provided Thus, the businesses results in less competitive as expected. 3. Lessons Learned from Eu to AEC 3.1. Financial Policy European Union follows Maastricht Treaty as a guideline to accept new member states. For monetary integration among the member states, the union set up their financial and fiscal policy and established the European Central Bank (ECB) to help monitor all money-related issues within EU. As for the ASEAN Economic Community (AEC), though the single currency among country members has not been discussed, there are financial integrations among AEC countries, for instance, Chiang Mai Initiative Multilateralization (CMIM), signed in 2009. 7 Table 4: Currency of Each Country (in USD Dollar) (Source: Association of Southeast Asian Nations 2011) Country Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Viet Nam 1998 2003 2008 2009 2010 1.7 1.7 1.4 1.5 1.4 3,836 10,014 3,298 3.9 249 40.9 1.7 41.3 13,268 4,001 8,575 10,554 3.8 737 54.2 1.7 41.5 15,509 4,079 9,691 8,744 3.3 917 44.5 1.4 33.3 16,303 4,159 10,356 8,516 3.5 918 47.6 1.5 34.3 17,067 4,190 9,078 8,256 3.2 842 45.1 1.4 31.7 18,382 Similar to EU situation portrayed above, table 4 illustrates the same phenomena of high variety among the AEC member states’ currencies. Therefore, if in the future AEC wishes to have a single currency as similar to the EU, they will have to consider about the EU case study; i.e., some member countries could not follow the single currency monetary policy resulting in a less flexibility in their monetary system, which might lead to the unsolvable problems and “Domino” effect among member countries. In the AEC strategic plan, the “Capital Account Liberalization” will help remove the capital controls and restrictions set by each country. This will enhance flexibility of the capital flow among member states. The “Capital Market Development” strategy will help increase capacity and outline the long-term foundation for development of ASEAN capital markets (The ASEAN Secretariat, 2011). This is organized in order to achieve the long-term collaboration across the boarders and to improve the market access, linkages and liquidity among member countries. However, in case ASEAN countries would like to form the single currency, Table 4 could illustrate the same phenomena of high variety of each member state’s currency. Therefore, it might result in the same problem as European Union when some countries could not flow along with the single currency rate. 3.2. Free Flow of Labor Unlike European Union, according to the ASEAN Economic Blueprint, one of the free flows among ASEAN countries is free flow of skilled labor; whilst European Union allows every level of labor to work across its member states. 8 According to General Agreement on Trade in Services (GATS) Mode 4 set up by the World Trade Organization (WTO), movement of natural persons, skilled individuals and professionals (Ofreneo R., 2008) refer to Firstly, business visitors who engage in business without seeking employment, Secondly, traders and investors who carry out specific trading and investment activities, Thirdly, intra-corporate transferees who are employees of MNCs that move their staff across borders and finally, professionals which include doctors, nurses, lawyers, accountants, engineers, IT personnel and other professionals. According to ASEAN’s regional and bilateral FTAs, ASEAN Economic Blueprint follows GATS by allowing only skilled and professional labors to relocate across boarder. Therefore, with free flow of labor in term of AEC, the movement of semi-skilled and unskilled labor is restricted and those workers have to follow normal policy of VISA application of each member state (Yue C.). According to the Blueprint, the first observation could be drawn is that the duration of stay of those skilled labors is rather short compared to semi-skilled and unskilled labors. This means that both destination and origin countries would not experience loads of changes of the skilled labors, which could transfer knowledge and build up the knowledge management network among member countries. This way, ASEAN countries would become more integrated and higher competitiveness. However, without a well-designed management policy, “Brain Drain” situation could take place among countries in ASEAN. Though with “Brain Drain” situation, the existing labors in the lower wages countries would strive to acquire a higher knowledge and skills, which means that more skilled labors are generated, the fact that skilled labor from less developed countries will flee into more developed countries and the countries of origin will lack of skilled labors. This could lead to decreasing growth rate of development and other social problems. If the bad consequence does occur, the overall development rate of ASEAN countries will eventually be declined. 3.3. National Government Financial Policy According to AEC Blueprint, there are action plans to promote financial activities in regional infrastructure areas as follows; firstly, Promote greater participation of private sectors and international organizations in financing regional infrastructure development such as the ASEAN Partnership Group (APG), Trans-ASEAN Gas Pipeline (TAGP), Singapore-Kunming Rail Link (SKRL), and ASEAN Highway Network; and To remove or relax impediments to cross-border investment in financing of regional infrastructure projects (Association of Southeast Asian Nations, 2011). However, not only regional infrastructure should be set, local infrastructure in 9 each member states should also available in order to integrate mutual economy within the region. With this clear objective, financial integration in ASEAN would be accomplished by the following three main aspects; Financial Services Liberalization, Capital, Account Liberalization, and Capital Market Development (Association of Southeast Asian Nations, 2011). ASEAN aims to promote trade liberalization by allowing ease of access to financial services, removing capital controls and restrictions which are similar to the EU policy. However, to avoid the similar pitfalls as what happened in case of EU, AEC should establish an organization to monitor and maintain the economic status of each member country and to ensure that each participant will make a cautious investment through national infrastructure development, or other states government bonds. Additionally, even though funding will be made more easily due to the lower interest rate, adequate degree of debt repayment of each country is dramatically vital. More importantly, the monitoring should consistently and continuously be enforced. 3.4. Small- Medium Enterprises Small Medium Enterprises (SMEs) are the major driver of economic in ASEAN. It accounts for greater than 96% of all enterprises and 50% to 85% of domestic employment. Additionally, 30% to 53% of GDP also comes from the SMEs sector (Association of Southeast Asian Nations, 2011). To ensure the sustainable development of SMEs in ASEAN community, the Strategic Action Plan for ASEAN SME Development 2010-2015 is developed with the aim to Enhance the competitiveness of SMEs in the region Improve access to finance, develop human resource, Establish an ASEAN SMEs Service Center, and Set up an ASEAN SMEs Regional Development. 10 Table 5: Five major plans for SMEs under the AEC Blueprint (Source: Association of South East Asian Nations 2011) Timeline 2008-2009 2010-2011 2010-2011 2012-2013 2014-2015 Expected Action A common curriculum for entrepreneurship in ASEAN Comprehensive SME service center with regional and sub-regional linkages in ASEAN member states SME financial facility in each ASEAN member state A regional program of internship scheme for staff exchanges and visits for skills training A regional SME development fund for use as a funding source for SMEs that are undertaking business in ASEAN Even though the plan is expected to create a strong position of SMEs sector which will ensure the economic sustainability and social development, several challenges are being concerned. For instance, there are some issues raised by ASEAN members about the limited access to finance, technology, and market among member states. In addition, management skills among ASEAN SMEs, standard environment policy, and information management are also being questioned referred to Association of Southeast Asian Nations. All of these issues have to be correctly addressed and focused to achieve real ASEAN SMEs cooperation in AEC. 4. Conclusion In term of currency, AEC has established the financial integration but has not yet introduced the concept of single currency among AEC member states. However, if in the future, the AEC would like to form the single currency, the policy makers should study how diverse each country’s currency is and set up the well-constructed criteria in order to avoid the same issues that happened to the EU. Regarding labor movement between member states, both EU and AEC have ratified to allow the free flow of movement among member countries. Even though the labor collaborations of EU and AEC are not all similar, i.e., EU allows every level of labor to work across the member states, while AEC only implement this cooperation on skilled labors, AEC labor policy makers should consider the possibility of the Brain Drain issue as it could be the main impediment to the growth rate of the whole community. In the aspect of national government financial policy, similar to the EU, AEC establishes financial cooperation which aims to promote trade liberalization by allowing ease of access to financial services, removing capital controls and restrictions. However, to avoid any economic instability in the future, as learned from EU situation, AEC policy maker should set a protocol to monitor and maintain the economic status of each 11 member states and should be able to ensure that each member state will make a cautious investment. 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