How Far Apart Are Two ACUs from Each Other? : Asian Currency Unit and Asian Currency Union

This paper examines the future evolution of the Asian currency arrangements from broader perspectives, including the optimal currency area theory and the experience with the European Currency Unit (ECU). Most academic literature on this topic concurs that the optimal currency area conditions seem to be met by subsets of Asian countries although the ultimate success of an Asian currency union hinges crucially on such factors as the historical and political backgrounds, robustness of institutional set-ups, degree of regional convergence in developmental stages, and track record of sound macroeconomic policy in constituent countries. It is also a valid concern whether the transition toward a currency union could be susceptible to speculative currency assault. The experience with the ECU suggests that a successful Asian currency unit requires preconditions including the firm political commitment, market-wide expectations of the eventual currency unification, and existence of well-functioning financial markets as well as cross-border payment/settlement systems. We can learn further from the fact that the ECU was handicapped by a lack of cash currency, which led to its limited use in commercial transactions, and inadequacies of settlement arrangements. The ECU as a divergence indicator was also rarely focused on, despite the fact that the exchange intervention thresholds were defined in relation to the ECU.