Regional Financial Governance: Lessons from the Eurozone

Ilene Grabel

The strange, complicated drama involving the Eurozone’s bureaucratic core, Germany and Greece, European officials, and the IMF demonstrates that the matter of creating regional alternatives to the global financial architecture is politically charged and even fraught. The tensions raised around Greece reveal many of the deficiencies in Europe’s regional financial architecture—especially the puzzling absence of a lender of last resort, a regional surveillance mechanism, and a mechanism for coordinating fiscal policies among member nations. These deficiencies should be taken seriously by those working in the developing country context insofar as many of us have long looked toward regional financial governance as a more democratic and inclusive alternative to the global financial architecture.

We know that the East Asian crisis of 1997-98 awakened interest in regional financial architectures in the developing world. That crisis gave voice to an aborted proposal for an Asian Monetary Fund that eventually formed the basis, in 2000, for the bilateral swap agreements that are at the heart of the Chiang Mai Initiative (CMI). The CMI is a potentially important regional architecture involving ASEAN nations, China, Japan and South Korea. The current financial crisis has been a powerful impetus for expanding the scope of the CMI.  In May 2009 the CMI was “multilateralized,” such that it is now known as the Chiang Mai Initiative Multilateralisation, CMIM.

The CMIM is a $120 billion regional currency reserve pool from which member countries can borrow during crises.  China, Japan and Korea provide 80% of the CMIM’s resources. The transformation of the CMI to the CMIM is significant because it increases the scope of central bank currency swaps and reserve pooling arrangements in the region.  This introduces the possibility that countries that are members of the CMIM will not need to turn to the IMF when they face liquidity crises in the future.

There is one critical and difficult matter that must be resolved before the CMIM can ever challenge the IMF in the region, however. That is the matter of regional surveillance: at the behest of creditor countries, disbursals from the CMIM in excess of 20% of the credits available to a country require that a borrowing country must be under an IMF surveillance program. As the situation in Greece indicates, the project to devise and implement regional surveillance faces daunting political obstacles.

It appears that political sensitivities (and rivalries) among Asian neighbors run even higher than in Europe, making the design of a regional surveillance mechanism the likely site of protracted negotiations (especially among China, Japan and South Korea). This fact limits the extent to which the CMIM can displace IMF governance in the region in the near future.  But perhaps the evident costs of the EU’s failure to resolve the surveillance matter in Europe will give CMIM members the motivation to take up the matter seriously before the next crisis.

Less ambitious forms of regionalism have been galvanized by the current crisis.  We have seen that the Asian, Inter-American and African Development Banks have responded to the crisis in their regions in some cases more quickly and with larger loans than we’ve seen from the IMF and the World Bank. For example, the Asian Development Bank increased its lending within the region by $3 billion including loans made under the new Countercyclical Support Facility.

Moreover, regional responses have emerged in other quarters. The Latin American Reserve Fund (Spanish acronym FLAR) was founded in 1978 and is based in Colombia. It has a capitalization of just over $2.3 billion. It offered to make available liquidity credit lines totaling US $1.8 billion to member countries confronting the effects of the current financial crisis. FLAR extended a $482 million loan to Ecuador in April 2009. As Ngaire Woods notes the African Development Bank made a loan of $1.9 billion to Botswana in June 2009, and Brazil’s national development bank has lent some $15 billion to countries in the region during the crisis.

What does all of this mean about the prospects for regional financial governance? European experience serves as a negative lesson to policymakers in the developing world interested in using the Eurozone as a model. But the crisis has prompted various types of regional financial initiatives that hold promise for developing countries, particularly if momentum to build upon these strategies survives the crisis.

The matter of creating durable alternatives to the current global financial architecture is not a simple matter, as European experience suggests. Whether regional financing arrangements will emerge as an enduring counterweight to the IMF is something that is very much uncertain today, and very much worth close attention as the crisis continues to unfold.

3 Responses to “Regional Financial Governance: Lessons from the Eurozone”

  1. William Grimes says:

    Nice post, Ilene.

    A lot of questions still surround CMIM, at least partly because participants have decided to not to make the actual agreement publicly available. Luckily, this post gets the essentials right on both CMI and CMIM.

    The one important element that should be added to your brief assessment is that the issue that is generally short-handed as “surveillance” is only partly about surveillance. Really, this is a question of enforcement more than monitoring, and the leading countries (Japan and China) have made the strategic decision that they would prefer to delegate decisionmaking rather than be put in the position of having to enforce harsh conditions on an ASEAN+3 partner. Although CMIM calls for an independent surveillance unit, it is hard to imagine how an ASEAN+3-created unit would be either highly competent or independent. In the absence of a better alternative, Japan and China are stuck with the IMF. Neither CMIM nor the Greek debacle is likely to change this.

    It is worth noting, however, that CMI (and CMIM even more so) constitute a credible threat of exit from the IMF conditionality regime. This means that the IMF will be unlikely to impose the kind of harsh conditions seen in 1997, for fear of making the latent “AMF threat” into a real one.

    This comment is getting quite long, so I will do the self-serving thing and refer any interested parties to my book Currency and Contest in East Asia, which goes into these and other issues in much greater detail.

    Bill Grimes

  2. Ilene Grabel says:

    Excellent points, Bill–thanks! I especially like the argument about the way that the CMIM (despite its insufficient institutionality, at least based on what we know about the agreement) increases the bargaining power of countries in the region vis-a-vis the IMF. That alone is an important achievement as far as potential policy space.

  3. chetmemaydi says:

    Great post. I will be going through some of these issues as well..