Contemporary global economic trends have indeed demanded closer linkages with other nations within one’s region. Tactics used to enhance regional ties have included the signing of free trade agreements within the region, establishing forward and backward linkages across industries, reducing non-tariff barriers to goods coming in from other regional nations and generating demand for commodities produced regionally. Some regions have gone as far as to unify all countries under one currency and we all know which region we are talking about.
The crisis currently faced by the euro zone has sparked an endless debate across the world as these strong and sustaining economies could never be expected to falter. However, it won’t be wrong to say that the whole region is only as strong as its weakest link, which is Greece at the moment. With the Greek economy inching towards a likely default, European leaders and financial managers are on the lookout of a possible solution that could shield the region from further fiscal trouble.
One possible solution has taken over the discussion floor since a while – euro bonds. A common bond, issued by all euro zone countries, is expected to resolve the ever growing debt crisis. It is expected to strengthen the ability of weaker economies to pay back their debt by acquiring funds at lower interest rates. Moreover, alacrity and opposition towards the idea, both emerge from the region itself. On one hand, there seems to be no alternative for the euro zone to inhibit further exorbitant levels of fiscal debt and on the other hand, stronger economies, Germany and France have expressed reluctance in adopting such a move. The issuance of a common euro bond would require convergence on interest rates, which according to German Chancellor Angela Merkel is not a feasible act as it must be preceded by similar “competitiveness levels and budget situations,” definitely not the case with European economies.
Another mystery revolves around the rating that the euro bond would acquire. Would it attain a strong one owing to support from Germany, France and other steady players and how much would its rating depend upon the weakest link? Fears suggest that easier financing through euro bonds might trigger even a worse fiscal situation due to excessive borrowing in the future.
However, as suggested by Merkel, it is highly imperative to note differences amongst economies, often depicted through major indicators. Where does one draw the line between convergence and divergence? If one interest rate wouldn’t be able to represent the entire region, then, was converging on one currency the right choice in the first place? One currency for a whole array of countries, with varying economic indicators including GDP growth rates, fiscal debts, competitive sectors, interest rates, unemployment rates, research and development levels and various others.
There is no doubt that these efforts are implemented to enhance trade of goods and services, encourage financial consolidation through the ease of transactions within the region. However, just as late industrialisers have greatly benefitted from the experience of Britain, the US and Japan, the EU debacle holds lessons for many of the late “regionalisers.”
As mentioned in the beginning, regionalisation is playing a global role, especially in emerging markets with ASEAN in the East Asian region, SAARC in the South Asia and Mercosur in Latin America. These nations are definitely exploiting the benefits of regional trade and linkages and generating regional demand for lesser dependence on western markets in the future, however, a word of caution from the EU crisis would raise concerns and would keep policy makers on their toes before they channel towards excessive integration.
The writer is a freelance business journalist