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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

Summit of Business within Portuguese-Speaking Countries

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President of Equatorial Guinea, Teodoro Obiang.

Long before the Portuguese-speaking countries wrapped up their first business summit in Simpopo, Equatorial Guinea that gathered approximately 250 government officials and corporate business leaders from Guinea Bissau, Cabo Verde and Sao Tome and Principe, Portugal, Brazil and Mozambique, it was described as a step directed at bringing sustained business development.

Some argued that the gathering historically provided the chance for immense business networking opportunities and building strategies. It additionally offers an important impetus for strengthening future corporate business collaboration among the countries.

According to the organisers, the primary goal was to explore ways to attract investments to the countries in bloc, as well as strengthening economic ties between member states and improving the business environment.

Opening the two-day summit, promoted by the Confederation of Businesspeople of the Community of Portuguese-language Countries (CPLP), President of Equatorial Guinea Teodoro Obiang, said frequent militant attacks in Cabo Delgado, in northern Mozambique, should be of concern to the Community of Portuguese Speaking Countries (CPLP).

“The Republic of Mozambique is the scene of aggressions perpetrated, planned and financed from outside its borders, claiming human lives, displacing populations, destroying personal and public property, and sowing terror in the north of the country,” he said.

Obiang believes that the CPLP “should not remain oblivious to this tragedy, which goes beyond the dimensions of a simple internal conflict. It is an aggression”.

He characterised it as an opportunity to identify the challenges the bloc faces and seek ways to facilitate trade between CPLP countries as well as attracting more investment. “Our wish is that the business community takes this opportunity to form a common front when it comes to facing the challenges that affect its activity. It should also make the most of its respective advantages to participate actively in promoting economic cooperation among the CPLP countries, always having as priority the member countries of our community,” the Equatorial Guinea president said.

President of Cape Verde, Jorge Carlos Fonseca, who participated in the summit virtually, advocated for the creation of customs facilities for CPLP countries within the bloc. “There is an urgent need to create joint solutions for the reciprocal protection of investments, reducing, or even eliminating, where possible, double taxation, and facilitating the circulation of public documents within our community without excessive authentication and notarisation burdens,” he urged.

President of Sao Tome and Principe, Evaristo Carvalho, spoke of the need for investments in the CPLP countries to be sustainable, especially in Equatorial Guinea, which was experiencing a boom in mineral resources. “Our appeal is to look at the country with confidence, stripped of a culture of short-termism. With thought for the country’s development, let’s seek sustainable solutions and invest in the medium and long term, he advised.

While various issues were discussed during the two days, there was particular interest in mineral exploitation, oil and gas development within the bloc. The panel session spent time analyzing widely the various dimensions and aspects of the sector.

Equatorial Guinea’s Minister of Mines and Hydrocarbons has called for a common project of the Portuguese-language countries for gas exploration, stressing the need for a longer energy transition in some African countries. “Hydrocarbon producing countries such as Equatorial Guinea, Angola, Mozambique or Brazil and Portugal, as a major consumer, it is very important that we can work on a coordinated project at the CPLP level to be able to exploit the gas for use in our economies,” Gabriel Obiang Lima said.

“It will be increasingly difficult to get funding to develop our [oil] products because worldwide there is a great motivation to carry out the energy transition from hydrocarbons to renewable energy,” he noted.

Despite this, he said, in countries such as Equatorial Guinea and others in Africa, this transition will have to take at least another 20 years. “Only then will we be at the level of developed countries,” he said.

The Equatorial Guinean Minister was speaking at a panel with government officials from Guinea Bissau, Cabo Verde and Sao Tome and Principe, as well as representatives from Portugal, Brazil and Mozambique on the role of governments in attracting foreign investment.

Speaking at the panel session, Luís Moreira Testa from the Portugal’s Socialist Party in Parliament, explained that in the new advent of renewable energy, Portugal has the potential to move from energy consumer to producer. “Hydrocarbons will serve in the coming decades as transition fuels. Portugal is a major consumer of natural gas, mainly from Algeria, and the new generation of natural gas consumption in Europe foresees the mandatory inclusion of green hydrogen,” he said.

According Luis Testa, the pipelines that bring gas from Algeria may soon take the gas produced in Equatorial Guinea or Mozambique cut with green hydrogen produced in Portugal. “This could be a great opportunity for energy communion in the CPLP,” he said.

Cabo Verde’s Minister of Trade, Industry and Energy, Alexandre Dias Monteiro, considered mobility within the Portuguese-speaking community as a critical factor for creating a favourable framework for business and foreign investment. “Mobility is a critical factor for contacts and exchanges between companies and businesspeople,” he said, stressing the progress made in this area in recent years, which should make it possible to sign a mobility agreement at the next summit of heads of state and government, in July in Luanda.

Guinea-Bissau’s Economy Minister, Victor Mandinga, advocated the creation of an investment promotion agency at the community level to link up with agencies in each of the countries. “This mechanism is essential to make legislation on investment more homogenous and the distribution of investment opportunities between countries more harmonised,” he said, adding that businesspeople lacked transversal information about the CPLP as a whole.

Sao Tome’s Foreign Minister, Edite Ten Jua, noted the importance of creating a climate of trust for attracting investment, particularly in terms of legal protection and tax justice, as well as simplifying administrative procedures, along with the existence of infrastructure and means of transport and communications.

President of the Community of Portuguese Speaking Countries Business Confederation Salimo Abdula, speaking during the opening, urged the governments of member countries to speed up the process of creating the CPLP Community Development Bank to facilitate financing for bloc projects.

“The bank will be a tool which will support projects of small, medium or large size, thus overcoming the difficulty of access to financing, which often has a high cost in CPLP countries, making projects unfeasible,” Abdula argued.

Abdula further proposed the creation of a CPLP arbitration court, because, despite being united by the same language and economic interests, conflicts between stakeholders from different member states could arise.

“This court would make it easier to settle disputes between businesspeople in the community. At this moment, this project (the CPLP Arbitration Court) is at a very advanced stage. A team was formed that is working hard on the subject and has already produced several document proposals and prepared a questionnaire aimed at defining an ideal model for the construction of such an arbitration court,” Abdula told the gathering.

The opening of the summit coincided with World Portuguese Language Day. According to Rádio Moçambique, there is an estimated 300 million speakers spread across four continents. The first CPLP Business Confederation business summit held under the motto, “Together We Are Stronger and Move the World Forward” in Simpopo, Equatorial Guinea.

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Economy

Can Sukuk Match the Growth Trajectory of Green Bonds?

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As the socially responsible investing movement in fixed income began to take off a decade ago, a great deal of ink was spilled on the similarity of green bonds and Sukuk. Both products are explicitly ethical and appeal to investors’ social consciences over and above their desire for financial returns. The thesis at the time was that an ever-increasing number of investors would seek out these types of ethical investments, leading to a steep upward trajectory in demand for both green bonds and Sukuk. MICHAEL BENNETT writes.

***

To a certain extent, that thesis has played out. Between 2010 and 2020, the annual issuance of green bonds increased from less than US$5 billion to more than US$270 billion. They have successfully transitioned from being a highly niche product to one that has a role in the portfolios of major institutional investors across the globe. Green bonds became the product that mainstreamed socially responsible investing on the fixed income side of the capital markets.

Sukuk have also increased during that time-period, going from US$53 billion of annual issuance in 2010 to US$140 billion in 2020. While a 164% increase in annual issuance volume is impressive, it clearly lags the 5,300% growth for green bonds. This divergence in the growth trajectory of the two products can also be observed in Chart 1 that looks at annual issuance volumes between 2014 and 2020:

In absolute terms, it should come as no surprise that Sukuk volumes now trail green bonds, as there is a much larger market globally for conventional instruments than for Shariah compliant ones.

Even the most passionate supporters of Islamic finance accept that the potential market for Islamic products is only a fraction of that of their conventional comparators. However, that does not explain why, in percentage growth terms, Sukuk have fallen so far behind green bonds. Why has one product exploded while the other has made only a steady climb?

Many explanations have been offered for why Sukuk have not grown at a faster pace in recent years. These usually focus on global economic hurdles that have impacted the market (eg oil price declines, COVID-19-related slowdowns).

However, many of these same issues have impacted, to one degree or another, the conventional markets as well. In addition, some economic hurdles could reasonably be expected to increase issuance volumes (eg a decrease in oil prices could cause an oil-exporting sovereign to have greater need to tap the capital markets).

Therefore, these explanations seem insufficient to fully explain how green bonds have grown at such a faster clip than Sukuk.

I believe the reason for the difference may stem in part from the fact that the Sukuk market has simply not responded sufficiently to the socially responsible investing movement. As the remarkable growth of the green bond market proves, predictions a decade ago that socially responsible, fixed income investing was about to take off were correct.

In other words, the socially responsible investing wave did indeed come. The problem for Sukuk is the product has not found the best way to ride that wave.

Sukuk are ethical instruments. They cannot be used to finance impermissible activities like gambling, tobacco and weapons manufacturing. Also, they are structured to avoid high degrees of leverage and speculation, and therefore promote a sounder financial system.

Many investors who are motivated by ethics and feelings of social responsibility should be quite happy to add Sukuk to their portfolios, regardless of whether they are adherents of Islam.

A conventional bond has none of these built-in restrictions. Therefore, to make a conventional bond an ‘ethical investment’, additional steps must be taken, for example adding covenants to limit the potential uses of the financing. This building-in of these additional prohibitions is the genesis of green bonds and other labeled sustainable development bonds. In essence, these bonds adopt the types of restrictions on the use of proceeds that already to a certain degree exist for Sukuk.

However, the Sukuk market has not sold the standard Sukuk product as ethical. Rather, it has treated Sukuk as equivalent to a conventional bond (no better or worse from an ethical perspective), and therefore sought to develop green and socially responsible labels for certain types of Sukuk that mimic the labeling that is required to make a conventional bond ethical.

I believe such labeling of certain Sukuk can have the unfortunate impact of obscuring the ethical nature of the basic Sukuk product and, at the extreme, possibly throwing the social responsibility of most Sukuk into doubt.

In other words, if certain Sukuk are labeled ‘socially responsible Sukuk’, what does that imply about all the Sukuk that do not carry that label?

While I certainly would not advocate against green and other types of labeled Sukuk, I think the Sukuk market needs to spend more time and effort to be clear that such labeled Sukuk are simply a special use of proceeds instruments within a broader universe (ie all Sukuk) that is already ethical in nature.

Such an approach would mirror the one the World Bank takes in the conventional market. The World Bank issues green and other labeled bonds from time to time, but the priority always is to stress the ethical nature of all the issuances.

By focusing on the ethical quality of the Sukuk product itself, I believe Sukuk can best benefit from the ethical investing movement, and take its place, aside green bonds, as an ethical investing success story.

World Bank

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Economy

US Sanctions Against Russian Sovereign Debt: Possible Alternatives

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The US and the EU have imposed new sanctions against Russia because of the so-called “Navalny case”. The European Union has activated the human rights sanctions mechanism approved by the EU Council in December 2020. On March 2, the EU added four Russian security officials to its sanctions list. The sanctions include a ban on entry to the EU, an assets freeze in the EU and a ban on economic transactions with persons involved in the lists. However, such officials are unlikely to have assets in the EU. Even if they exist, such assets are not significant for the Russian economy. The sanctions were introduced as a reaction to the arrest and then imprisonment of Alexei Navalny, while restrictions on the topic of the alleged poisoning were introduced back in October 2020. At the time, six high-ranking Russian officials and the Research Institute of Organic Chemistry and Technologies were subject to the restrictions. Such sanctions have zero impact on the Russian economy.

Unlike the EU, the US has refrained from imposing sanctions following the alleged poisoning of the politician last year. However, on March 2, they were introduced, both in connection with the poisoning and in connection with his subsequent arrest. That is, the topics of the use of weapons of mass destruction and human rights violations were combined. The blocking sanctions targeted seven Russian officials who were already affected by EU sanctions, as well as three research institutes. Trade sanctions were imposed against 14 companies. US government agencies have been prohibited from lending to Russia and a ban was introduced on the supply of weapons and on the provision of US financial assistance. These measures have no impact on the economy. These companies are not the backbone of the economy, Russia does not need US help, it does not buy weapons from the United States, and it does not take loans from US government agencies.

However, the new US sanctions are still fraught with uncertainty. The key question is whether the United States is imposing restrictions on Russian sovereign debt obligations. Such a measure could cause more serious damage and have an impact on the world markets.

The prospect of sanctions against Russian government bonds is related to the specifics of the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991. Properly it is used as a legal basis for the imposition of sanctions in the event that a country uses chemical weapons (in the US and the EU, it is assumed that Navalny was poisoned with a substance from the Novichok group). The CBW Law envisages the imposition of sanctions in two stages. On March 2, 2021, the first stage was implemented (a ban on aid, military supplies and loans from government agencies). If, within three months after the first stage, the President does not provide Congress with evidence that the target country has not abandoned the use of CBW and has not given reliable guarantees of their non-use in the future, then the second stage of sanctions will be introduced. It is important to note here that guarantees of non-use should be determined by UN inspections or those provided by another international organisation. Obviously, Russia will not give such guarantees and will not allow any inspections. Moreover, according to the statements of the Russian authorities, Russian chemical weapons were destroyed long ago. In other words, the second round of sanctions is inevitable. The CBW Law obliges the US President to impose at least three of the six types of sanctions. The most unpleasant of these is the ban on American banks from lending to the Russian government.

There has already been a precedent for using CBW against Russia. The sanctions were imposed in connection with the Skripals case. In 2018, the first stage was carried out, and in 2019 — the second. It was secured by Donald Trump’s executive order No. 13883. The decree reflected two types of sanctions — a ban on lending to the Russian government and blocking aid through the IMF. Then trade restrictions were added. If the last two measures were symbolic, then the ban on lending potentially had more serious consequences. However, this measure was applied in an extremely limited manner. The ban applied only to Russian government bonds denominated in foreign currencies, while most of them are denominated in rubles. The sanctions also did not affect the debt of Russian state-owned companies.

In general, the issue of sanctions against Russia’s sovereign debt has been raised many times on other occasions. In 2017, within the framework of Art. 242 of PL 115-44 CAATSA, Congress ordered the US Treasury to give an opinion on the appropriateness of such sanctions. Officials noted in their report that such sanctions would hurt Russia, but were also fraught with market fluctuations and costs for American investors. Such sanctions have repeatedly been proposed in sanction bills, including the most famous ones — DASKA and DETER. However, they have never been passed into law. In 2019, the State Department criticised DASKA.

The forthcoming second round of sanctions over the Navalny case will again raise the issue of restrictions on Russian sovereign debt. Two alternatives are possible. The first is the preservation of the existing restrictions already adopted by Trump in 2019, or their cosmetic expansion. The second is a more radical tightening, including bonds denominated in rubles. The second alternative cannot be ruled out, especially if there is another escalation in the Navalny case. If the status quo is maintained, the first option is most likely.

From our partner RIAC

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