Regional Economic Cooperation in Europe under Capital Flows and Implications for Asia

The European experience shows that regional solutions can play an important role in promoting as well as managing capital flows. However, this paper shows that regional financial cooperation is neither a simple technical process nor a panacea. First, to be feasible, a program of regional economic cooperation should be compatible with national interests. Second, a regional economic cooperation cannot solve all the problems. In spite of a closer cooperation to maintain the stability of the ERM, the financial crisis finally broke out. This episode shows that the cooperation cannot beat the fundamental economic logic. On the other hand, the regional financial cooperation should be based on adequate national policy actions towards structural reforms, well-functioning regulatory and supervisory system and sound macroeconomic policy because regional policy coordination by itself cannot guarantee those objectives. Third, the regional economic cooperation entails necessarily tensions around the governance of economic policy. Whether the objective of policy coordination is structural policies, or financial regulation and supervision, or fiscal policy, the effectiveness of the coordination would be better guaranteed by a centralized framework, while the respect of the national sovereignty might dictate a decentralized and weak form of coordination. These lessons extracted from the European experience can be used as a useful guide to other regions including Asia. The regional cooperation can serve as an important policy tool for promoting integration of regional financial markets and better management of capital flows.