Euro lessons for South Asia
During the Hindustan Times Leadership Summit in 2004, the then Indian Prime Minister Atal Bihari Vajpayee spoke of the possibility of South Asian economies integrating enough to create a common currency. He described this as an “ambitious” but “achievable” goal.
This was a poorly thought out idea. However, it was the kind of soaring rhetoric that a politician seeking the stature of a statesman would be expected to say. One, Vajpayee stuck it in as the last bit of what was a more sensible call for greater South Asian economic integration. Two, given that the euro was only a few years old at that point and doing very well, everyone was trying to bask in its reflected glory.
Today, of course, the euro is in crisis and being blamed for the dire economic straits that the European Union finds itself: small and fiscally irresponsible economies awash in debt, sounder export-driven economies going back on their political commitment to union, and everything pointing to a decade or so of muddle and economic stagnation. And the collateral damage going along with that is the rise of anti-immigrant sentiment, economic protectionism and a general abandonment of Europe as a postmodern political paradise.
Given the European experience, does a South Asian currency make sense? Only in a fixed set of circumstances that look right now impossible to achieve.
A currency does not exist alone. It is the manifestation of a monetary policy. Which means a South Asian currency would require the amalgamation of the monetary policies of all the countries involved. That would take a degree of trust between countries that won’t be happening in a hurry. Not just India-Pakistan, but India-Bangladesh and India-Nepal relations as well.
As Europe is showing, a common currency becomes a liability in time of crisis if the currency region does not also have a common labour policy and a common fiscal policy. Once you’ve got that far, you have in essence merged the primary elements of governmental administration.
Curiously, one suspects South Asia would have less problems with labour mobility. The Indian border is so porous that it already allows the free flow of millions of Nepalese and Bangladeshis. But a common monetary and fiscal policy would be impossible in a region filled with sovereignty conscious nations.
There are some gains from a single currency – transactions costs are less and so on. But the real gains are political. The euro was ultimately about the greater European project. The same would be true for a South Asian currency: the gains would be political and would be embedded in a larger process of rapprochement between India and Pakistan in particular.
For one analysis that takes that view. On the other hand, South Asia is unusual in the overwhelming dominance of India. Indian rupees are already accepted as local currency in places like Nepal and the border areas of Bangladesh. In the same way that many weak Latin American countries adopted the dollar as their currency, something similar could in time happen with the Indian rupee.