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The impact of EU crisis on EU-ASEAN Relations

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The Association of Southeast Asian Nations (ASEAN) countries have watched the crisis in Euro zone closely. Southeast Asia countries experience similar crisis towards the end of 1990s which shattered ‘the Asian micracle’ and, arguably, shifted EU interests away from the region.

Nowadays, peoples and governments in ASEAN countries perceived the EU crisis differently. These mixed responses reflect how Asian countries have assessed suspected sources and impacts of the crisis on the European integration. From those mixed responses, one may analyse some possible directions of EU-ASEAN relations.

This article addresses the impacts of EU financial crisis to inter-regional cooperation between EU and ASEAN such as EU-ASEAN dialogue, ASEAN Regional Forum, and Asia-Europe Meeting (ASEM). It is built around the argument that ASEAN countries would keep EU as an important partner but the character of the inter-regional relations is likely to change Despite EU financial difficulties and integration problems, people in ASEAN countries still believe that historically-proven European endurance would bring EU survive the crisis. The financial crisis, however, make the Southeast Asians not only perceive  EU less powerful than before but also  find out that  the global power has shifted to Asia. The study is based on primary and secondary data gathered from document study, Focus Group Discussion (FGD), interview with key actors, and observation of EU activities in ASEAN countries

The organization of the article is as follow: a short explanation on the importance and significance of the study is succeeded by an elaboration on the existing inter-regional relations between ASEAN and EU. It is continued with a description on economic and diplomatic relations  based on quantitative and qualitative data. Finally, the article analyses the impacts of the crisis on ASEAN-EU relations.

 

A. EU crisis and the need to study ASEAN-EU inter-regionalism
Crisis in Euro zone unfolded since 2009 has halted EU’s efforts to maintain a high standard welfare to peoples in its member countries. Indeed, the austerity packages in the crisis-thorned countries –the PIGS- to save their economies and the Euro have driven some people to question the objective of EU integration. The crisis in Euro zone started in Greece in 2009. A year later, Ireland, Italy, Portugal and Spain  experienced similar troubles.  This crisis has brough EU to continuing financial problems.

In Southeast Asia in which severe financial crisis rampaged toward the end of 1990s, bringing down some of the strongest regimes and collapsed what so-called ‘Asian economic tigers’, the EU crisis has been perceived with a mixed response.  Some are surprised given the fact that Euro was stronger than the US dollars for many years. Others see the crisis as the consequence of EU strange economic arrangement – having a single currency but maintaining independent fiscal policies. Some other are more positive toward the European strength, thinking crisis is natural in Europe and the people would overcome the crisis with their resilience that they would re-emerge stronger after the crisis. Nevertheless, a few people believe that the crisis is a ‘karma’ to the Europeans because of what they did to Asian people during the Asian financial crisis. These mixed responses reflect how Asian countries have assessed suspected sources and impacts of the crisis on the European integration. From those mixed response, one may analyse some possible directions of EU-ASEAN relations.

Within the context of Euro zone crisis and the mixed responses from people in Southeast Asia, the question on the future of EU-ASEAN inter-regionalism deserves a careful study. The question is important as the two regional institutions represent almost one third of world’s population and can form an alternative axis of global trade. ASEAN and EU key figures can be seen below:

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The significance of the study lies in three aspects. Firstly, ASEAN-EU inter-regionalis excludes the US, creating an alternative international relations from politico-strategic as well as economic and cultural perspectives. Secondly, the region-to-region, rather than country-to-country relations are a distinctive and new practice in international relations that requires an understanding of its merit and limitations.  This inter-regional pattern of interactions in international relations has arisen in the last two decades, so it is reasonable to investigate what can work or not work and what can be expected from such relations. Thirdly, the relations between Europe and  Southeast Asia date back to more than five centuries ago when the first European fleet when through the Straits of Malacca and started establishing colonialism. The centuries European occupation and trade monopoly have left various colonial legacies –positive and negative- in Southeast Asian countries. Any contemporary interactions between the two regions can not be made immune from the colonial experience and the feeling of anti-colonialism sometime emerge from the Asian side. The feeling sometimes stronger as the Southeast Asian countries shared common historica legacy vis-a-vis their European counterparts in the inter-regional relations.

The term ‘inter-regionalism’ refers to region-to-region relations, defining as a group of countries that become the member of regional institutuions, which in this study focus on ASEAN and EU. ASEAN countries consist of ten countries in Southeast, ie. Indonesia, Malaysia, Singapore, Thailand, the Philippines, Brunei, Vietnam, Cambodia, Laos and  Myanmar.  The EU consists of 27 member states namely  Austria, Belgium, Bulgaria, Czech Pepublic, Crovatia, Cyprus, Denmark, Estonia, Findland, French, Hungary, Ireland, Italy, Germany, Greece, Malta, Netherlands, Latvia, Lithuvania, Luxemburg, Poland, Portugal, Romania, Sweden, Slovakia Republic, Slovenia, Spain, United Kingdom. ‘Regionalism’ refers to the design and implementation of a set of preferential policies among countries within the same geographical area in order to build harmonious relations in any or all aspects such as politic-security, economy or socio-culture. Regionalization is defined as ‘the grow of societal integration within a region and to the often undirected process of social and economic interaction’ (Hurrell 1995). Thus, what differentiates regionalism from regionalization is the design; while the former is directed by governmental agreements the latter is officially undirected and grows more naturally among non-state actors. This study is focused on the inter-regionalism.

Previous scholars have written on the inter-regionalism between ASEAN and EU. The inter-regionalism of ASEAN and EU were observed within the Asia-Europe Meeting (ASEM), as an exercise ground for a new pattern of global relationship ASEM has been observed as an exercise ground for a new pattern of global relationship (Dent 1997/1998; Cammak and Richards 1999; Gilson 2002, 2005). Nevertheless, there are two contrasting views of the application of the interregional framework. The earlier studies of ASEM treat the inter-regional relations between Asia and Europe in ASEM as the consequence of the failure of ASEAN-EU relations in 1980s  and as an alternative axis in the regional-based world order (Dent 1997/1998; Hanggi 1999; Cammak and Richards 1999; Dent 2001; Yeo 2007). Later studies on the inter-regional level of analysis and suggest that the inter-regionalism should be examined with a focus on the relations of the two regions, that is the social interactions between them, rather than as the consequence of some outside phenomenon (Gilson 2002, 2005).  

The focus on the importance of the inter-regional framework between Asia and European countries is particularly relevant when accepting the notion that the post-Cold War era is the time for the emergence of regional order, substituting the strategic competition of a bipolar world with cooperation and discord in the regional framework).  ASEAN-EU has also posed challenges in its mission to connect the Asian and European countries as they have different approaches to cooperation and international relations. Despite the rhetoric in ASEM’s summit statements that call for a deeper understanding towards each other, the Asian and European countries brought their own cooperation culture and approaches to international relations, thereby creating divertgent of interest. At the end, inter-regional relationships such as ASEM  and ASEAN-EU may work in both functional and cognitive ways (Gilson 2005, p. 310).

The inter-regionalism can also be approached with constructivist framework. In their analysis on inter-regionalism, Hettne and Soderbaum (2002), and Fawcett (2004) emphasize that regionalism is socially constructed through cognitive processes as actors respond to each other and to their environmental pressures. The framework helps identify the emergence of a defensive identity vis-à-vis external actors (Lee and Park 2001; Yeo 2003). It was also applied by Gilson (2002) in investigating the cognitive process of ASEM inter-regionalism  which reveals the social construction of regional identity for both ASEAN countries and their partners in Northeast Asia vis-a-vis EU countries through communication and interpretation of ‘us’ and ‘other’.

Study the inter-regionalism between EU and ASEAN as the consequences of the financial crisis in Euro zone area, thus, could provide insights into not only the competences of ASEAN and EU as regional actors but also recent perceptions of ASEAN and EU towards ecah other.

 

B. History of EU-ASEAN inter-regionalism
ASEAN and EU have been linked since 1970s when the European Economic Community (EEC) became the first institution that built a linkage for dialogue and cooperation with countries in the Southeast Asia. This linkage was formalized in 1977 in the 10th ASEAN Ministerial Meeting which followed by the first forum in Brussels.  Despite the creation of  EU-ASEAN Cooperation Agreement in 1980, however, the inter-regional framework could not develop further to enhance the relations of the two regions. Geographical distance between the two regions is a problem to strengthen economic and socio-cultural relations, nevertheless the difference of political values and agenda of cooperation seem to be the main reason for the deadlock. The most disagreement is on political issues, especially on human rights and democratization (Palmujoki 1997; Wisela 2007). Autoritarian governments in ASEAN countries were irritated with criticism from EU countries while the Europeans thought they should participate actively in global politics as the champion of human rights and democratization. Therefore, the contacts in 1970s and 1980s were more rhetorical than substantial in nature (Leifer and Djiwandono1998, p. 203; Stockhof and van der Velde 1999).  
It was the rapid and high economic development in East and Southeast Asia during the 1980s that drew the Europeans’ attention to what was perceived as ‘the world’s most dynamic region in the 21st century’ (Edwards and Regelsberger, 1990, p. 5; see also Richards and Kirkpatrick, 1999; Forster 1999). Consequently, EU launched ‘the New Asia Strategy’ in 1994 that underpinned the need of European countries to resume close ties with the Asian countries whose economic growth had been seen as a world phenomenon (European Commission, 1994).  

The inauguration of the Asia-Europe Meeting (ASEM) in Bangkok in 1996 was celebrated with enthusiasm and hopes in the two regions because this region-to-region forum represented a breakthrough in Asia-Europe relations and a unique arrangement: it did not include the United States (US) and was the first forum to which Asian countries have been summoned as a group to sit vis-à-vis their Europeans counterparts.  For Southeast Asian countries, the region-to-region relations between Asian and European countries in ASEM have some characteristics that are unusual in terms of their engagements in regional and global affairs. ASEM does not include the United States (US) and it was initially expected to balance the US-EU-Asia triangle. In addition, ASEM is the first forum in which Southeast Asian countries have been able to meet and coordinate collectively with countries in Northeast Asia, namely Japan, China and South Korea vis-à-visanother partner.  However, the enthusiasm soon shifted toward pessimism and criticism after the Asian financial crisis in 1997/1998 and following the war against terrorism after 9/11. Nevertheless, ASEM –now has 51 members- has survived despite the many criticisms about its ineffectiveness (Fitriani 2010).

The climate for inter-regional discourse has also been changing. Despite some downturns at the end of the 1990s and early 2000s, the inter-regional relations between Asia and Europe in ASEM have been constructed during a critical period of world history when East Asia has been developing as an economic powerhouse, while Europe has been seeking an identity as a global actor under EU. In January 2003 EU and ASEAN sigh joint declaration on Cooperation to Combat Terrorism. In July of the same year, EU commission launced its policy paper ‘A new partnership with Southeast Asia’.  This inter-regional cooperation was expanded in 2007 with the Nurenberg Declaration on the enhancement of EU-ASEAN Partnership followed by the Plan of Action which is adopted in the first ASEAN-EU Commemorative Summit in Singapore.   A year later, the inter-regional cooperation was planned for a free trade as the two regional entities agreed to negotiate a free trade agreement (FTA). This plan has been suspended in 2010 and EU started negotiating bilateral FTA with several ASEAN member states such as Singapore (concluded), Malaysia, and Thailand.

The development of the inter-regional relations between EU and ASEAN has been revivalized  since 2012. In April the two adopted Bandar Seri Begawan Plan of Action 2013-2017 to define to rout map of cooperation in the next five year. In July, EU also signed the ASEAN Treaty of Amity and Cooperation (TAC).     EU delegation in ASEAN countries has also been busy with various approaches and events to speed up the cooperation, not only between Government-to-Government but also between Business-to-Business.

 

C.  Impact of the Euro crisis on ASEAN-EU economic relation

The crisis in Euro zone and the continuing problems of settlement process have put a stress on Euro value.  The exchange rate on this currently has decreased significantly since 2008 the when first hit of global financial crises took place. Chart1 shows the drecreasing trend of the Euro value against the US Dollars.

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The Euro crisis and the financial crisis in the US have caused a shard declined of global trade experienced (see Chart 2 below). The collapsed of the rate of global trade in the period of 2008 to 2010 was believed as badly as the financial crisis during the great recession in 1930s.

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The declined global trade seems to bring no impact on EU-ASEAN trade relations as the trade between the two regions has kept growing after a sudden drop in 2009. The following chart show the development of EU-ASEAN trade from 1995 to  2011.

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Despite the increasing trend of EU-ASEAN trade in term of value, the place of EU among ASEAN trading partners decresed. The main trading partners of ASEAN countries are their Southeast Asian neighbours.   Chart 4 below implies that ASEA’s intra-regional trade remains the highest.

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In term of investment, EU countries has maintained their collective position as the second biggest source of FDI to ASEAN countries. The value of EU investment increased in 2011, however its proportion to the total investment in ASEAN fell.  The table below shows the figures from 2009 to 2011 gatherred by the ASEAN Secretariat.

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Notes: Details may not add up to totals due to rounding off errors.
1/ Ranked according to FDI inflows in 2011; covers countries on which data is available.
2/ Includes inflow from all other countries, as well as total reinvested earnings and inter-company loans in the Philippines.
3/Singapore’s data for 2011 excludes inter-company loans as geographical and industry breakdown are presently not available. Inter-company loans with intra-/extra-ASEAN breakdown for 2011 shown are estimated by the ASEAN Secretariat.
Source: ASEAN Secretariat FDI Statistic

 

The gap left by EU investors was quickly filled by intra-regional ones. The data in the following table reveals that capital inflows inform of FDI to ASEAN countries has increased drastically –threefold- since 2009.

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The above data also bring about the fact that for the first time, intra-ASEAN investment has grown significantly, jumping from 6,000 million US$ to almost 26,000 million US$ in three years. Economic integration among ASEAN economies, besides the worsening investment conditions in other parts of the world, may have encouraged ASEAN countries to send FDI to each other.

The financial crisis in the Eurozone also hit official development assistant from EU to ASEAN countries. The figures are fluctuated with a decreasing trend. While reached the highest in 2008, the annual growth of EU ODA to the Southeast Asian countries decreased in 2009 before hiked again in 2010 and followed with a drastic drop in 2011.

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The data shows that the financial crisi in Euro zone has brought some negative impacts on EU economic engagements in ASEAN countries. The conclusion of FTA negotiation between EU with Singapore and negotiation with Thailand and Malaysia seems to contribute to the rise of the trade value between EU and ASEAN countries. The EU position among ASEAN trading partners, however, decreased in 2011. Trading with China and intra-ASEAN continue to dominate ASEAN trade.  Similar trend –increasing in value but decreasing in proportion againts other ASEAN partners- also took place in regard to EU investment in ASEAN countries. It is unavoidably the result of EU financial difficulties. In addition, the shortage of EU financial resource also hit the flow of development assistant from EU to ASEAN countries  that have been fluctuated since 2006.  The total amount of FDI flow from EU to ASEAN countries has decreased since 2010 despite the fact that EU maintains a position as the second biggest source of FDI for Southeast Asia. Similarly, the annual growth of ODA from EU to ASEAN countries has slowed down to 20% in 2011 compared with 80% in 2008. In short, in economic relations, EU is an important partner of the ASEAN countries; the European countries, however, are not the most important one.

 

D. Impact of the Euro crisis on ASEAN-EU

Previous section has shown briefly the economic impacts of the Euro crisis on EU-ASEAN relations. This section analysis further impacts of prolonged crisis on the European and Southeast Asian countries political and diplomatic interactions.

Toward the end of the first decade of the 21st century, whereas the Euro zone experienced financial crisis, the ASEAN countries enjoyed an economic growth accelerated by the rise of China economy. Indeed, the East Asia became the engine of the global growth when the EU and the US suffered from the financial problems. The Southeast Asian region that was overlooked by the EU due to the financial crisis a decade before was transformed to a lucratic market of 600 million population with growing middle classes and increasing purchasing power. Consequently, there is an increasing trend in which EU pays more attention to ASEAN countries. As a global trading actor, EU naturally turns to see ASEAN countries as it main interests. Since 2009, there has been more enthusiasm from the EU side to approach to ASEAN.  In the same year, EU started appointing Ambassadors as representative to ASEAN after the Southeast Asian countries launched the ASEAN Charter that transform the regional institution as a legal entity.

In the subsequent years, EU launched an active economic diplomacy toward ASEAN. In 2011 the ASEAN-EU Business Summit (AEBS) was conducted in Jakarta to be followed by the second Summit in Phnom Penh a year after. EU Delegation in Southeast Asia and member states also exercised an active diplomacy to attract ASEAN investors. The regional FTA, which had been negotiated since 2007, was aborted in 2010. Subsequently, EU changed its strategy to approach ASEAN countries through bilateral FTA with the most advanced countries in Southeast Asia. The shift of efforts to establish regional FTA (EU-ASEAN) to bilateral FTA with several ASEAN countries shows EU short term strategy to accelerate trade relations with the most convenient partners while accepting the fact that ASEAN countries so vary in term of economic development and the readiness to wage effective trade relations. Despite the change of FTA strategy, EU trade deficit against the ASEAN countries prevailed.

Nevertheless, EU is keen to support the ASEAN integration. Provide funds for ASEAN integration projects. Since 2007, EU has actively assisted ASEAN integration.  The amount of official development assistants that EU provided for projects towards ASEAN integration to 70 million Euro for the period of 2007-2012.  It was used for various initiative in supporting ASEAN three communities.

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Table 3 shows that EU supports for the regional integration of ASEAN vary from establishing trust to trade liberalization and climate change. On one hand, those various supports reflect EU competence to play its role as a partner in regional development. On other hand, however, the supports were likely to be ineffective since they were operated through the project-based cycles in which sustainability is problematic. EU officials frequently stated that a more integrated ASEAN is better for the EU. This opinion perhaps derived from their frustration in negotiating with ASEAN member states. With the decreased of EU development assistant to ASEAN as showed in Chart 6, the European support for the regional integration in ASEAN is also under questions.

Under the active economic diplomacy, leaders of EU institutions as well as EU member states have frequently visited ASEAN countries. All top leaders from EU biggest member states took the difficulties of long haul flights from Europe to meet their counterparts in the capital cities of ASEAN member states. This trend – so many high profile figures from EU and EU member states to visit ASEAN countries- is never seen before. This phenomenon is in contrast with the frequent absence of EU leaders in the ASEM summits, especially those after the Asian financial crisis.

EU active economic diplomacy and the frequent visit of U top leaders have created a better atmosphere in EU-ASEAN relations. EU criticism on social or political practices in ASEAN countries continues but with a less frequency and intensity. This change on EU diplomatic style may derive from several factors. The first is EU leaders and official realized that they had a higher priority to pursue economic interests vis-à-vis the ASEAN countries. Secondly, the changes that took place in Southeast Asian countries have addressed different perspectives between EU and ASEAN countries, especially in political issues and human rights. The political openness and transformation in Myanmar, that used to be the problems in EU-ASEAN relations, seem to contribute indispensably in this improvement of political atmosphere. Thirdly, perhaps by paying more attention to ASEAN countries and by realizing their interest in the region, the Europeans are able to build a more culturally, socially, and politically sensitive approach in their diplomacy with ASEAN.  With this kind of approach, the EU officials as well as officials of EU member states  seem to be more open mind and more ‘appreciate’ to  what have been considered as Asian values and ‘ASEAN way’. The approach is reflected in more prudent comments on political issues in ASEAN countries and more restrain in putting forward criticism towards the ‘ASEAN way’. One of strategic steps taken by the EU is to accede to the ASEAN Treaty of Amity and Cooperation (TAC) in July 2012.

The crisis in the Euro zone and its impacts on EU active diplomacy in Southeast Asia has created mixed perceptions in ASEAN. An optimist view sees EU as a crisis fighter and believe that, as those in the past, the European countries would reemerge from the crisis stronger. However, the financial crisis has also spread skeptical views on regional integration and strengthened the refusal of ASEAN Economic Community. Those who adopt the latter perspective believe that the European integration and the common currency are very risky experiments that could create social, political and economic disaster if not chaos. The crisis in the Euro zone is a valuable lesson learn for regional integration in other parts of the world including in Southeast Asia. In addition, what has happened in Europe encourage perceptions that EU’s power is decreasing.

Despite the financial crisis and challenges to EU’s role as a global player, EU has shown an intention to deepen its relations with ASEAN. In April 2012, the two regional entities adopted the Bandar Seri Begawan Plan of Action which states to strengthen EU-ASEAN enhanced partnership for 2013-2017. The plan to enhance the inter-regional relations includes cooperation in policy and security. In 2012 and 2013, EU Representatives and high level officials from member states frequently stated that they expect EU could play a bigger role in the regional security.  However, it is not clear the reason behind this intention and what kind of role that EU could play in the Asian security. For ASEAN countries, China’s rise, its increasing assertiveness and the US’ pivot have increased tension in the regional politics and security. It would be a question whether EU needs a pivot to Southeast Asia too.  

 

E. Conclude
Inter-regional relations between ASEAN and EU have been established since 1970s.  This region-to-region engagement has gone through three crises that shape not only the nature of the relations but also the perceptions of each side towards each other.  The first is the strained relations during 1980s due to different political values that can be categorized as the crisis of common values between ASEAN and EU. This crisis hampered the development of the inter-regional relations; EU however preceded by enhancing bilateral relations with individual ASEAN countries namely Singapore and Thailand. The second is the Asian financial crisis that cracked some ASEAN countries towards the end of 1990s; the crisis that switched European previous interests and hopes on what so called ‘Asian economic miracle’. In the context of EU-ASEAN relations, this crisis loomed the relations and created a substantial negative feeling among affected ASEAN countries as the EU economies failed to respond as sincere partners that could be relied on for real supports and needed assistance. This crisis halted the development of not only ASEAN-EU relations but also their relations in the ASEM process. EU countries seem lost their interests in ASEAN and switched their attention to newly integrated countries in Central and Eastern Europe. The third and most recent event is the financial crisis in the Euro zone that has been responded variously by people and key persons from ASEAN, creating a momentum to re-address the inter-regional relations. This period is concomitantly with continuously high economic growth in East Asia, including main countries in ASEAN, encouraging the EU countries to realize on the importance of ASEAN economies for their own. The relations mirror those in early 2000s when enthusiasm in at side was met by cautiousness and restrained at the other side.

The data collected for this study show that economic relations between the two regions have been influenced by the crisis in the Euro zone since 2009. In term of trade, export and import of goods between the two regions has increased steadily after a drop in 2009. The data implies that the Euro crisis has boasted trade between the two regions, indicated by more active governments and business from EU countries to approach their partners in Asia. The trade, nevertheless, booked a surplus for the ASEAN countries. The increased trend of an active engagement in the inter-regional trade did not take place in investment and official development assistant.

The Euro crisis has created a more balanced enthusiasm in EU-ASEAN relations. Whereas EU seems to lost interests in Southeast Asia after the Asian financial crisis, the European countries return their attention to the lucratic market of ASEAN countries when they experience the crisis.  It may not ideal relations but economic interests continue to be the primary motive of the relations between the two regions.

The financial crisis in Euro zone makes the Southeast Asians not only perceive EU less powerful than before but also find out that the global power has shifted to Asia. It seems that ASEAN countries would keep EU as an important partner either in ASEAN-EU Dialogue Forum, ARF or ASEM; however, the character of the inter-regional relations is likely to change.

 

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Economy

Reforms Key to Romania’s Resilient Recovery

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Over the past decade, Romania has achieved a remarkable track record of high economic growth, sustained poverty reduction, and rising household incomes. An EU member since 2007, the country’s economic growth was one of the highest in the EU during the period 2010-2020.

Like the rest of the world, however, Romania has been profoundly impacted by the COVID-19 pandemic. In 2020, the economy contracted by 3.9 percent and the unemployment rate reached 5.5 percent in July before dropping slightly to 5.3 percent in December. Trade and services decreased by 4.7 percent, while sectors such as tourism and hospitality were severely affected. Hard won gains in poverty reduction were temporarily reversed and social and economic inequality increased.

The Romanian government acted swiftly in response to the crisis, providing a fiscal stimulus of 4.4 percent of GDP in 2020 to help keep the economy moving. Economic activity was also supported by a resilient private sector. Today, Romania’s economy is showing good signs of recovery and is projected to grow at around 7 percent in 2021, making it one of the few EU economies expected to reach pre-pandemic growth levels this year. This is very promising.

Yet the road ahead remains highly uncertain, and Romania faces several important challenges.

The pandemic has exposed the vulnerability of Romania’s institutions to adverse shocks, exacerbated existing fiscal pressures, and widened gaps in healthcare, education, employment, and social protection.

Poverty increased significantly among the population in 2020, especially among vulnerable communities such as the Roma, and remains elevated in 2021 due to the triple-hit of the ongoing pandemic, poor agricultural yields, and declining remittance incomes.

Frontline workers, low-skilled and temporary workers, the self-employed, women, youth, and small businesses have all been disproportionately impacted by the crisis, including through lost salaries, jobs, and opportunities.

The pandemic has also highlighted deep-rooted inequalities. Jobs in the informal sector and critical income via remittances from abroad have been severely limited for communities that depend on them most, especially the Roma, the country’s most vulnerable group.

How can Romania address these challenges and ensure a green, resilient, and inclusive recovery for all?

Reforms in several key areas can pave the way forward.

First, tax policy and administration require further progress. If Romania is to spend more on pensions, education, or health, it must boost revenue collection. Currently, Romania collects less than 27 percent of GDP in budget revenue, which is the second lowest share in the EU. Measures to increase revenues and efficiency could include improving tax revenue collection, including through digitalization of tax administration and removal of tax exemptions, for example.

Second, public expenditure priorities require adjustment. With the third lowest public spending per GDP among EU countries, Romania already has limited space to cut expenditures, but could focus on making them more efficient, while addressing pressures stemming from its large public sector wage bill. Public employment and wages, for instance, would benefit from a review of wage structures and linking pay with performance.

Third, ensuring sustainability of the country’s pension fund is a high priority. The deficit of the pension fund is currently around 2 percent of GDP, which is subsidized from the state budget. The fund would therefore benefit from closer examination of the pension indexation formula, the number of years of contribution, and the role of special pensions.

Fourth is reform and restructuring of State-Owned Enterprises, which play a significant role in Romania’s economy. SOEs account for about 4.5 percent of employment and are dominant in vital sectors such as transport and energy. Immediate steps could include improving corporate governance of SOEs and careful analysis of the selection and reward of SOE executives and non-executive bodies, which must be done objectively to ensure that management acts in the best interest of companies.

Finally, enhancing social protection must be central to the government’s efforts to boost effectiveness of the public sector and deliver better services for citizens. Better targeted social assistance will be more effective in reaching and supporting vulnerable households and individuals. Strategic investments in infrastructure, people’s skills development, and public services can also help close the large gaps that exist across regions.

None of this will be possible without sustained commitment and dedicated resources. Fortunately, Romania will be able to access significant EU funds through its National Recovery and Resilience Plan, which will enable greater investment in large and important sectors such as transportation, infrastructure to support greater deployment of renewable energy, education, and healthcare.

Achieving a resilient post-pandemic recovery will also mean advancing in critical areas like green transition and digital transformation – major new opportunities to generate substantial returns on investment for Romania’s economy.

I recently returned from my first official trip to Romania where I met with country and government leaders, civil society representatives, academia, and members of the local community. We discussed a wide range of topics including reforms, fiscal consolidation, social inclusion, renewably energy, and disaster risk management. I was highly impressed by their determination to see Romania emerge even stronger from the pandemic. I believe it is possible. To this end, I reiterated the World Bank’s continued support to all Romanians for a safe, bright, and prosperous future.

First appeared in Romanian language in Digi24.ro, via World Bank

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Economy

US Economic Turmoil: The Paradox of Recovery and Inflation

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The US economy has been a rollercoaster since the pandemic cinched the world last year. As lockdowns turned into routine and the buzz of a bustling life came to a sudden halt, a problem manifested itself to the US regime. The problem of sustaining economic activity while simultaneously fighting the virus. It was the intent of ‘The American Rescue Plan’ to provide aid to the US citizens, expand healthcare, and help buoy the population as the recession was all but imminent. Now as the global economy starts to rebound in apparent post-pandemic reality, the US regime faces a dilemma. Either tighten the screws on the overheating economy and risk putting an early break on recovery or let the economy expand and face a prospect of unrelenting inflation for years to follow.

The Consumer Price Index, the core measure of inflation, has been off the radar over the past few months. The CPI remained largely over the 4% mark in the second quarter, clocking a colossal figure of 5.4% last month. While the inflation is deemed transitionary, heated by supply bottlenecks coinciding with swelling demand, the pandemic-related causes only explain a partial reality of the blooming clout of prices. Bloomberg data shows that transitory factors pushing the prices haywire account for hotel fares, airline costs, and rentals. Industries facing an offshoot surge in prices include the automobile industry and the Real estate market. However, the main factors driving the prices are shortages of core raw materials like computer chips and timber (essential to the efficient supply functions of the respective industries). Despite accounting for the temporal effect of certain factors, however, the inflation seems hardly controlled; perverse to the position opined by Fed Chair Jerome Powell.

The Fed already insinuated earlier that the economy recovered sooner than originally expected, making it worthwhile to ponder over pulling the plug on the doveish leverage that allowed the economy to persevere through the pandemic. The main cause was the rampant inflation – way off the 2% targetted inflation level. However, the alluded remarks were deftly handled to avoid a panic in an already fragile road to recovery. The economic figures shed some light on the true nature of the US economy which baffled the Fed. The consumer expectations, as per Bloomberg’s data, show that prices are to inflate further by 4.8% over the course of the following 12 months. Moreover, the data shows that the investor sentiment gauged from the bond market rally is also up to 2.5% expected inflation over the corresponding period. Furthermore, a survey from the National Federation of Independent Business (NFIB) suggested that net 47 companies have raised their average prices since May by seven percentage points; the largest surge in four decades. It is all too much to overwhelm any reader that the data shows the economy is reeling with inflation – and the Fed is not clear whether it is transitionary or would outlast the pandemic itself.

Economists, however, have shown faith in the tools and nerves of the Federal Reserve. Even the IMF commended the Fed’s response and tactical strategies implemented to trestle the battered economy. However, much averse to the celebration of a win over the pandemic, the fight is still not through the trough. As the Delta variant continues to amass cases in the United States, the championed vaccinations are being questioned. While it is explicable that the surge is almost distinctly in the unvaccinated or low-vaccinated states, the threat is all that is enough to drive fear and speculation throughout the country. The effects are showing as, despite a lucrative economic rebound, over 9 million positions lay vacant for employment. The prices are billowing yet the growth is stagnating as supply is still lukewarm and people are still wary of returning to work. The job market casts a recession-like scenario while the demand is strong which in turn is driving the wages into the competitive territory. This wage-price spiral would fuel inflation, presumably for years as embedded expectations of employees would be hard to nudge lower. Remember prices and wages are always sticky downwards!

Now the paradox stands. As Congress is allegedly embarking on signing a $4 trillion economic plan, presented by president Joe Bidden, the matters are to turn all the more complex and difficult to follow. While the infrastructure bill would not be a hard press on short-term inflation, the iteration of tax credits and social spending programs would most likely fuel the inflation further. It is true that if the virus resurges, there won’t be any other option to keep the economy afloat. However, a bustling inflationary environment would eventually push the Fed to put the brakes on by either raising the interest rates or by gradually ceasing its Asset Purchase Program. Both the tools, however, would risk a premature contraction which could pull the United States into an economic spiral quite similar to that of the deflating Japanese economy. It is, therefore, a tough stance to take whether a whiff of stagflation today is merely provisional or are these some insidious early signs to be heeded in a deliberate fashion and rectified immediately.

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Economy

Carbon Market Could Drive Climate Action

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Authors: Martin Raiser, Sebastian Eckardt, Giovanni Ruta*

Trading commenced on China’s national emissions trading system (ETS) on Friday. With a trading volume of about 4 billion tons of carbon dioxide or roughly 12 percent of the total global CO2 emissions, the ETS is now the world’s largest carbon market.

While the traded emission volume is large, the first trading day opened, as expected, with a relatively modest price of 48 yuan ($7.4) per ton of CO2. Though this is higher than the global average, which is about $2 per ton, it is much lower than carbon prices in the European Union market where the cost per ton of CO2 recently exceeded $50.

Large volume but low price

The ETS has the potential to play an important role in achieving, and accelerating China’s long-term climate goals — of peaking emissions before 2030 and achieving carbon neutrality before 2060. Under the plan, about 2,200 of China’s largest coal and gas-fired power plants have been allocated free emission rights based on their historical emissions, power output and carbon intensity.

Facilities that cut emissions quickly will be able to sell excess allowances for a profit, while those that exceed their initial allowance will have to pay to purchase additional emission rights or pay a fine. Putting a price tag on CO2 emissions will promote investment in low-carbon technologies and equipment, while carbon trading will ensure emissions are first cut where it is least costly, minimizing abatement costs. This sounds plain and simple, but it will take time for the market to develop and meaningfully contribute to emission reductions.
The initial phase of market development is focused on building credible emissions disclosure and verification systems — the basic infrastructure of any functioning carbon market — encouraging facilities to accurately monitor and report their emissions rather than constraining them. Consequently, allocations given to power companies have been relatively generous, and are tied to power output rather than being set at absolute levels.

Also, the requirements of each individual facility to obtain additional emission rights are capped at 20 percent above the initial allowance and fines for non-compliance are relatively low. This means carbon prices initially are likely to remain relatively low, mitigating the immediate financial impact on power producers and giving them time to adjust.

For carbon trading to develop into a significant policy tool, total emissions and individual allowances will need to tighten over time. Estimates by Tsinghua University suggest that carbon prices will need to be raised to $300-$350 per ton by 2060 to achieve carbon neutrality. And our research at the World Bank suggest a broadly applied carbon price of $50 could help reduce China’s CO2 emissions by almost 25 percent compared with business as usual over the coming decade, while also significantly contributing to reduced air pollution.

Communicating a predictable path for annual emission cap reductions will allow power producers to factor future carbon price increases into their investment decisions today. In addition, experience from the longest-established EU market shows that there are benefits to smoothing out cyclical fluctuations in demand.

For example, carbon emissions naturally decline during periods of lower economic activity. In order to prevent this from affecting carbon prices, the EU introduced a stability reserve mechanism in 2019 to reduce the surplus of allowances and stabilize prices in the market.

Besides, to facilitate the energy transition away from coal, allowances would eventually need to be set at an absolute, mass-based level, which is applied uniformly to all types of power plants — as is done in the EU and other carbon markets.

The current carbon-intensity based allocation mechanism encourages improving efficiency in existing coal power plants and is intended to safeguard reliable energy supply, but it creates few incentives for power producers to divest away from coal.

The effectiveness of the ETS in creating appropriate price incentives would be further enhanced if combined with deeper structural reforms in power markets to allow competitive renewable energy to gain market share.

As the market develops, carbon pricing should become an economy-wide instrument. The power sector accounts for about 30 percent of carbon emissions, but to meet China’s climate goals, mitigation actions are needed in all sectors of the economy. Indeed, the authorities plan to expand the ETS to petro-chemicals, steel and other heavy industries over time.

In other carbon intensive sectors, such as transport, agriculture and construction, emissions trading will be technically challenging because monitoring and verification of emissions is difficult. Faced with similar challenges, several EU member states have introduced complementary carbon taxes applied to sectors not covered by an ETS. Such carbon excise taxes are a relatively simple and efficient instrument, charged in proportion to the carbon content of fuel and a set carbon price.

Finally, while free allowances are still given to some sectors in the EU and other more mature national carbon markets, the majority of initial annual emission rights are auctioned off. This not only ensures consistent market-based price signals, but generates public revenue that can be recycled back into the economy to subsidize abatement costs, offset negative social impacts or rebalance the tax mix by cutting taxes on labor, general consumption or profits.

So far, China’s carbon reduction efforts have relied largely on regulations and administrative targets. Friday’s launch of the national ETS has laid the foundation for a more market-based policy approach. If deployed effectively, China’s carbon market will create powerful incentives to stimulate investment and innovation, accelerate the retirement of less-efficient coal-fired plants, drive down the cost of emission reduction, while generating resources to finance the transition to a low-carbon economy.

(Martin Raiser is the World Bank country director for China, Sebastian Eckardt is the World Bank’s lead economist for China, and Giovanni Ruta is a lead environmental economist of the World Bank.)

(first published on China Daily via World Bank)

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