Working Paper Series E-2013-01

Lessons of the Euro Crisis: A New Asian Financial Order?
-From Japan’s perspective -Hideki Hayashi(EUSI in Tokyo)©2013 Hideki Hayashi. All rights reserved. Short sections of text, not to exceed
two paragraphs, may be quoted without explicit permission provided that fullcredit is given to the source.
0The Author thanks the valuable comments by Professors Hungdah Su, Chin-peng Chu,
Toshiro Tanaka, Maxim Bouev, Yulia Vymyatnina, Irina Kuznetsova-Morenko,Chiaki
Moriguchi, and all the participants of Asian Pacific Round Table on the European Union
Studies – 2013.1.29-30 Hualien,Taiwan

Abstract
This article examines the lessons of the Euro Crisis for Asia, regarding the various
short-term and long-term measures and the frameworks for coping with the crisis in theregion, especially in the financial sector. Short-term measures need to be taken urgently,
but medium and long-term measures should be realized in reliable, self-enforcing
institutions, thus it is essential to analyze them based on an insititutionalist approach,rather than an intergovernmentalist approach.
In the Euro Crisis, both short-term measures and medium-term measures have been
implemented mainly by European institutions, namely the EU and European Central
Bank (ECB). In Asia, on the other hand, urgent short-term and measures were
implemented mainly by the IMF and other supernational institutions. In Asia, such
short-term measures continue to exist and evolve as various frameworks such as the
Chiang Mai initiative, which was also effective for preventing the contagion from theLehman shock and the Euro Crisis, which later spread on a global basis.
Still, in Asia, an overall framework or institution to cope with a regional crisis isrequired, as the Chiang Mai initiative is, even though it has been enforced and widened
since the time of the Asian Crisis, merely a safety net agreed and maintained by thecentral banks in ASEAN + 3.
In order to establish such effective institutions to prevent a regional crisis, discussion
on economic integration among the governments of ASEAN + 3 and other regional
actors is essential, based on political stability among ASEAN +3 nations. Japan should
naturally contribute to such discussions to establish effective institutions for such
purpose.
Keywords: Euro Crisis, Asian Financial Crisis, institution, safety net, Banking
Union, EU - Japan Relations
Introduction
In Europe, when the Greece Debt Crisis broke out in Autumn 2009, the price of Greek
government bonds plummeted. The shock spread first to the small countries, Irelandand Portugal, then, as the serious situation continued, to some medium and large
countries such as Spain, Italy and even France. The situation continued to worsen for atleast three years, until the EU and European Central Bank announced measures that1

seemed to be effective in Autumn 2012.
In Asia, the Asian Financial Crisis broke out in 1997 in Thailand, in the form of thesudden fall in the foreign exchange rate of the Thai Baht against major currencies.
Then the crisis spread to Indonesia, the Philippines, Malaysia, then finally to almost all
ASEAN countries and Korea, until these countries were eventually saved by a rescue
package of the IMF and other organizations.
What are the differences between these two crises and what important lessons can belearnt? As has already been mentioned, the European crisis started in government bondmarkets and the ASEAN crisis started in the foreign exchange markets. The EU andEuropean Central Bank (ECB) played the major role in rescuing the countries in trouble
in Europe, even though the IMF worked jointly with them, on the other hand in Asia,
the IMF played the major role.
In this article, for closer comparison, the measures to overcome the crisis are divided
into two categories according to their different characteristics: short-term and medium
to long-term measures. To be effective, short-term measures should be implemented
quickly and effectively and the content of such measures should go beyond the
expectations that prevail among the key actors in global society, both politically andeconomically. In order for the medium to long-term measures to be effective, theinstitutions affected by the proposed measures should be both credible and sustainable.
Such institutions should continue to exist and develop, growing in credibility, both
politically and economically.
In this article, first we discuss the background to and the reasons for the European
Crisis, and then we examine the measures to cope with the crisis, both in the short-term
and medium-long-term. Second, the Asian Crisis is discussed in a similar manner. In
conclusion, the measures taken for both crises are compared and implications are maderegarding which measures should be taken in future. The previous efforts andcontribution of Japan to solve the crises, and the possibilities for the future, especiallyin Asia, are also discussed.
The Euro Crisis: How it occurred and worsened
In Autumn 2009, the newly elected Greek government announced that the previous
government had hid a huge fiscal deficit. Although the deficit had been known about in
Europe and there had been severe criticism especially from major countries such as
Germany, It was an unexpected shock for global society, especially for global financial
markets. This revelation triggered the Euro Crisis, which is still continuing.
There are considered to be two reasons why the Euro crisis has lasted so long: First,
the crisis led to a so-called vicious circle, or vicious ‘triangle,’ composed of three factors,
the deterioration of the economic situation in the Eurozone, the fiscal crisis, and thefinancial crisis (Bekx 2012). After the Lehman shock in September 2008, the Eurozone
2

economy was seriously affected by global factors including a decrease in exports fromthe Eurozone. Then, in response to such economic deterioration, the fiscal expenses of
the Eurozone governments increased, on the one hand, almost automatically to pay forthe increased cost of social security, for example unemployment insurance, and on theother hand, by the discretionary increase of expenses decided by the Eurozone
governments, especially that by the countries in trouble. Such increases in fiscal
expenses lead to an increased supply of government bonds, which worsened theenvironment of the Eurozone government bond markets. At this stage, the balance of
supply and demand in the markets worsened. Bond prices fell sharply, in other words,
bond yields went up. Then there was widespread fear in the markets that the fiscal
situation would not improve in some countries, such as Greece, since the plans todecrease the fiscal deficits announced by the governments were not credible.
The decrease in the bond prices of such countries was always larger than that ofGermany, which is considered to be the economically ‘safest’ country in the Eurozone. At
this stage, the divergence between the yields of Greek government bonds and that ofGerman government bonds, which has been the benchmark of the Eurozone bondmarket, widened.
What were the results of such instability? First, it naturally increased the costs offunding for the Greek government, which had a further negative effect on its fiscal
balance. Since the cost of raising the money for income continued to increase, it wasmore and more difficult for the troubled countries to improve their fiscal balances.
Second, the instability began to spread to other small countries such as Portugal and
Ireland, which have relatively small economies in the Eurozone, then later to therelatively large economies of Italy and Spain, through the intensified anxiety ofinvestors. This spread of the crisis is called contagion. Third, not only Eurozone
investors but also global investors, who had invested in Greek and other countries’
government bonds became worried about the fiscal situation of these countries anddecided to withdraw their investments. The above-mentioned situation as a whole iscalled the fiscal crisis.
Then, the fiscal crisis caused the financial crisis. In Europe, most banks holdgovernment bonds as assets, especially those of their own countries. This phenomenon
still existed even though the Eurozone financial markets had become more integrated
since the introduction of the Euro in 1999. In addition, the feeling of home bias
remained by which European banks tend to invest in their own country’s government
bonds, as the banks consider themselves better informed regarding the condition of
their own country’s government bonds than the condition of other countries’ government
bonds. At the same time, major banks in the Eurozone, especially in large countries
such as Germany and France, expanded their holdings of government bonds since theintroduction of the Euro, not only of their home countries but also the small and3peripheral countries such as Greece. This was mainly because the exchange rate risk
from such holdings was eliminated in Eurozone markets and the yields of thegovernment bonds of small countries such as Greece were normally higher than those ofGermany and France, reflecting the fiscal situation of such countries, which means theinvestors of the government bonds of small countries achieved lower risks and higher
profits. But when the fiscal deficit measured in GDP for Greece became worse than
expected, investors suddenly changed their minds and decided to withdraw theirinvestments in Greek government bonds. This had a further strong negative effect on
the price of Greek government bonds. In other words, the fall of the price of Greek
government bonds was accelerated by the decisions of investors. Then the fall of theprice spread to other government bonds, those of Ireland, Portugal, and Italy and Spain.
The fall in the price of the bonds also affected the value of the government bonds thatremained as assets of banks in the Eurozone. They suffered from a huge evaluated lossof assets. At this stage, the fiscal crisis caused the financial crisis in the Eurozone.
Finally, as the financial crisis deepened, the European banks become increasingly
reluctant to lend money to corporations and industries because the losses the banks
incurred from the Greek bonds worsened their financial results and made them morerisk adverse. As a result, the CEOs of the corporations in the Eurozone became
increasingly pessimistic toward making new investments in their factories etc. and thecorporations became less active due to the restrictions in the money supply from banks.
This caused a vicious circle in the Eurozone, with further deterioration of the economic
situation, the fiscal crisis, and the financial crisis
What measures were taken to halt this vicious circle and what measures could havebeen taken? In answering these questions, the strict and negative attitude ofGermany together with some other rich countries in the Northern Eurozone, such as
Finland and the Netherlands should be considered. Since the Greek fiscal problem wasrevealed in Autumn 2009, the discussions on how to cope with this issue continued on
an EU level and could not reach a fruitful conclusion until May 2010, when the heads ofstate or government of the Euro area decided to implement a support package for
Greece jointly with the IMF (European Commission, 2010).
Urgent measures taken by the EU and the ECB
During the six months from Autumn 2009, discussions on an EU level continued, butreached only partial or minor results due to the strong reluctance of Germany, and suchoutcomes were always behind the expectations of the financial market participants who
wished to obtain relief from the EU and the IMF on their holdings of Greek government
bonds.
Why has Germany been so strict regarding the rescue of Greece? The former Greek
government had hidden the fiscal deficit for a long time and this was known among4

countries including Germany, who doubted the capability of Greek political leaders. At
the same time, Germany has a long-standing dislike of inflation, due to their previous
experiences of hyperinflation. As a generous fiscal policy may lead to inflation byincreasing the expenses of governments, fiscal discipline is a key pillar of German
economic policy. Such German idea was reflected in the Maastricht Treaty, especially in
the Maastricht Criteria, which determines the conditions for becoming a member of the
EMU, on inflation rates, fiscal balance, fiscal deficit, long-term interest rates, andexchange rate stability. So if a country such as Greece passed the Maastricht Criteria,
became a member of EMU and then widened its fiscal deficit and asked other Eurozone
countries for help, it would be regarded as ‘a free rider,’ which had enjoyed the economic
benefits accruing from the increased fiscal expense but tried to avoid the higher cost offunds or cutting their fiscal budget. Otherwise the countries in trouble, not only Greece
but also other countries, which might have similar problems, would create a moral
hazard, under which they had the expectation of being saved whenever they had a fiscal
problem. In addition, among German citizens, general dissatisfaction mounted that themoney that German citizens paid as tax to their government should not be transferred
to problem countries such as Greece. Prime Minister Merkel and other German
politicians should have understood the importance of the role of Germany in solving thecrisis on an EU level, but at the same time they could not neglect the opinions ofGerman citizens, especially at the time of elections.
Based on this background, such strict attitude of Germany continued even after thisfirst rescue package of May 2010 was announced. A typical example is the strong
opposition of Germany to the idea of Eurobonds issued based on the creditworthiness of
the EU as a whole, including Germany. It was proposed by the European Commission in
2011, but has not been approved finally by the Council of the EU. The current balance of
the Eurozone as a whole has been approximately balanced. On the other hand, thecurrent balances of the Eurozone countries have become increasingly divergent, forexample, between that of Greece and Germany. This was contrary to the expectations at
the start of the EMU in 1999, that is, the current balances among the Eurozone
countries were expected to converge once the single currency had been introduced. The
divergence may have widened because competition in the various industries
strengthened the market leaders in the single market with one single currency andthere was almost no mechanism to compensate for this discrepancy, such as theredistribution of fiscal policy covering the EU, which includes the whole Eurozone. In
order to compensate for such discrepancy, a Eurobond might have been useful, but
Germany opposed the idea insisting that it may cause Greece and other troubled
countries to rely too much on the scheme.
When urgent measures for the crisis were introduced by the EU, pressure on the ECB
mounted because the ECB had to cope with the crisis as the stability of the European
5financial markets, not only the bond markets but also the stock markets and foreignexchange markets, and it had to develop measures to recover such situation. Since
Mario Draghi was nominated as the president of the ECB in November 2011, he started
to implement effective measures to stabilize the financial markets. In other words,
President Draghi decided to take several measures that exceeded the expectations of
the financial market participants. First, the ECB decided to implement the long-term
repurchase operation (LTROs), by which it would supply money for 3 years, which is an
unprecedently long time, to the financial institutions in the Eurozone twice, in
December 2011 and February 2012. Banks in the Eurozone were relieved as they could
raise the money easily at lower cost from the ECB. A large portion of the money was
allocated through the balance sheets of Eurozone banks to invest in government bonds,
including those of Italy and Spain. Second, the ECB enforced the facility of purchasing
the government bonds. It started the Security Market Programme (SMP) for the firsttime in May 2010, at the same timing that the EU and the IMF decided the first rescue
package for Greece. Since it was not sufficient considering the deteriorating fiscal
situation of Greece and the contagion to other countries, especially to Spain, the ECB
announced that it would start an unlimited purchase facility of Eurozone Government
Bonds: Outright Market Transactions (OMT). These two measures, providing long-termmoney to financial institutions and the unlimited purchase of government bonds,
exceeded the expectations of financial market participants at each announcement. In
this sense, they were effective measures to cope with the crisis. Still, they were urgent,temporary measures to recover from an irregular, unstable situation of the financial
markets, and designed only for the short-term. In addition, their remarkable result at
the first stage was based on the surprise of the market participants at theannouncements. Therefore as time passed, such positive effects diminished. They did
not remove the substantial causes of the crisis. In other words, they did not halt thevicious cycle, which is composed of the fiscal crisis, the financial crisis, and the slowing
economy.

New Framework of the EU: Is It an Institution?
Then, what are the necessary conditions for solving the crisis in the long-term? The
establishment of a permanent framework is a necessary condition but may not be a
sufficient one. For example, the European Financial Stability Facility (EFSF) wasestablished on the occasion of the first rescue package for Greece in May 2010, as atemporary framework. It was supposed to be transformed to the European Stability
Facility (ESM) as a permanent framework, scheduled to start from July 2011. Even
though there was a delay in its establishment, due to an argument in Germany, theESM was established in October 2011. But will its establishment immediately work to
6

improve or solve the crisis in Europe? Even if the ESM has been acknowledged to workby the financial market participants at the start of the establishment, will it continue towork in the same way from now on?
In order to answer these questions, we should refer to the theory on European
Integration. There have long been discussions between intergovernmentalists and neo
functionalists. The former assumes the sovereignty of the countries even when theynegotiate opportunities on integration. On the other hand, the latter stresses ‘how
spillover processes and the autonomous actions of super rational actors (including theCommission and European Court of Justice) contribute to European policy making’(Pierson, 1996)1. In this article, we rely on historical institutionalism that, according to
Pieson’s paper, ‘actors may in a strong initial position, seek to maximize their interests,
and nevertheless carry out institutional and policy reforms.’ We rely on historicalinstitutionalism because it understands the integration as a path-dependent process ‘inwhich initial institutions or policy decisions can become self-reinforcing over time’(Pierson, 1996).
It is especially applicable to the analysis of the institutions and policies in Europe,
which will be developed for the long-term, not only to cope with the present crisis but
also to prevent a crisis that may occur in future and cause a problem for the European
integration process. The institution built for European integration should be
self-reinforcing, in other words, credible and robust over time, facing the expectations offinancial market participants, which may change from time to time.
Having these discussions in mind, we next examine what has been decided in the EU
and how the institution for the further integration process will become credible for the
long-term.
First, at the European Council in June 2012, it was decided to develop ‘a specific andtime-bound road map for the achievement of a genuine Economic and Monetary Union.’
Under this agenda, the Council clearly decided to take the measures of the Banking
Union, which are composed of three frameworks, the Single Supervisory Mechanism(SSM), the Single Resolution Mechanisms, and the Deposit Guarantee Mechanisms.
It was a turning point in EU policy and a step toward building up frameworks forfurther integration of Economic and Monetary Union. Under this decision, theEuropean Council announced clearly that, among the three factors of ‘the vicious cycle,’
the financial crisis should be tackled by the Banking Union, before the other two factors,
the fiscal crisis and the slowing economy, in order to pave the way for the longer-term
integration. In other words, the European Council took a realistic approach to cope withthe financial crisis first, as it was already found difficult to solve the fiscal crisis directly,
1.

The analysis of institutions is an area of overlap between Politics and Economy, especially when the focus ofanalysis is on the historical development of institutions (Pierson, 1996).

7either by the issue of Eurobonds to allocate money to countries in the Eurozone or by
the efforts of respective countries in trouble to recover from the fiscal deficit.
Concerning the three measures of the Banking Union, the Single Supervisory
Mechanism (SSM) was understood as the top priority. This was because, first, only after
the Single Supervisory Mechanism was realized, was the direct recapitalization ofbanks supposed to be possible, which will be an effective way to stabilize the financial
sector in the Eurozone, without affecting the fiscal balance of the country where theproblem banks are located. Second, the European Central Bank (ECB) is acknowledged
as a credible actor that has various measures to stabilize the financial markets, not onlyin the Eurozone but also on a global basis.
After several discussions, on 5 December 2012, the so-called ‘Blue Print’ was proposedby President Herman Van Rompay of the European Council. It was officially titled‘Towards a Genuine Economic and Monetary Union’2. It was basically agreed later as
the roadmap for the completion of EMU, in one part of the Conclusions of the European
Council on 13/14 December 2012. The Blue Print specified the three stages as the timeframework: Stage 1 (End 2012-2013), Stage 2 (2013 – 2014) and Stage 3 (post-2014). At
the same time, three main policy areas were mentioned, corresponding to each factor of
the vicious cycle of the crisis, an Integrated financial framework, Integrated budgetary
framework, and Integrated economic framework. In this way, the time schedule forthree policy areas was specified. According to this time schedule, the Integrated
financial framework should have priority. Most works on this area should be done inStage 1 and Stage 2. In particular, ‘it is imperative that the preparatory work can startin earnest at the beginning of 2013, so that the SSM can be fully operational from 1
January 2014 at the latest’ and under such time schedule ‘the legal and operationalframework for ESM direct bank recapitalization should be finalized by the end of March2013’ (Van Rompuy, 2012). In addition, ‘the SSM will need to be complemented by asingle resolution mechanism, as well as more harmonized deposit guarantee
mechanisms,’ and the proposal for these two other mechanisms than the SSM is
supposed to be agreed at Stage 1, later specified ‘until June 2013 ’ by the European
Council. On the other hand, in the other two policy areas most tasks should be done inStage 2 and Stage 3. Concerning the Integrated budgetary framework, in spite of some
additional frameworks (so-called ‘two-Pack ’) that strengthen the fiscal discipline of theEurozone countries, the two new frameworks will be realized later; Financial incentives
linked to contractual arrangements at Stage 2, which provides the incentives, based on
the mandatory agreements for Eurozone countries, to the countries that make efforts to
2. In the Blue Print, Political Accountability is mentioned as the fourth policy area, which we do not discuss in thisarticle. Throughout the three stages,’ Commensurate progress on democratic legitimacy and accountability’ areplanned.

8

improve their fiscal discipline, and country-specific shock absorption at Stage 3, which
includes the setting-up of risk-sharing tools called Fiscal Capacity, a kind of common
fund to absorb such shocks. In the area of Integrated economic framework, in addition
to the framework for the ex-ante coordination of economic policy reforms that exist, thearrangement of the surveillance for the coordination assumes the development offrameworks in other policy areas, especially the Integrated budgetary framework.
Therefore it will be implemented basically at Stage 2 or later.
In this context, the initial plan of institution, including the time schedule, has been set
in December 2012. Step-by-step measures will evolve based on the accumulation of theresults of the three policy areas, in other words, from Banking Union to Fiscal Capacity.
Based on such initial setting, the new institution of the European Integration will
evolve as a self-enforcing, robust one depending on the interaction between theimplementation of the EU on announced at the initial stage and the response from theexternal environments, either positive or negative, especially from financial market
participants.
Asian Financial Crisis: The development of a safety net
The Asian Financial Crisis broke out first in July 1997 in Thailand, spread toIndonesia, the Philippines, then finally to almost all ASEAN countries and Korea, by
the end of the year. It is not necessary here to follow the whole story of how the Asian
Financial Crisis happened, deepened and finally resolved, but to describe interesting
points for comparison with the European Crisis.
First, the Asian Financial Crisis led to a sharp depreciation in local Asian currencies in
the foreign exchange markets, starting from the sudden depreciation of the Thai Baht.
The background to such movements in the financial market was that the pegging of theThai Baht to the US dollar, the international currency, lost its credibility. At first, theinflows of money sustained the pegging of the Thai Baht to the US dollar, but when the
inflows of money continued and flowed from the banking sector to the real estatemarkets, real estate prices became irrationally high. Then the foreign market
participants decided to withdraw their investments from Thailand. On the other hand,the start of the Euro Crisis was the sharp decrease in the price of Greek government
bonds. The Greek fiscal deficit triggered the crisis and there was almost no other way
for financial market participants to react, since Greece had adopted the Euro, the single
currency. Generally, foreign exchange markets are more volatile than government bondmarkets, since the flow of money in the former moves in the shorter-term than in thelatter. Still, at the time of the respective crises, both Thailand and Greece relied on
inflows of money from overseas market participants, who decided to withdraw theirinvestments, causing a serious shock in both markets. The crisis became contagious inboth cases for similar reasons as financial market participants became increasingly
9anxious. In Europe, the crisis spread from Greece, to the government bond markets of
Ireland, Portugal, Italy and then Spain. In Asia, the crisis spread to the forex markets
of Indonesia, the Philippines, Korea and most other ASEAN countries.
The second question was: who were the actors who arranged the rescue package tocope with the respective crises? To cope with the Euro Crisis, it was mainly the EU andthe ECB who implemented urgent measures. The IMF also contributed, but they acted
basically in collaboration with the EU and the other European actors, as was typicallyseen in the arrangement for the rescue packages of Greece. On the other hand, the IMF
arranged the urgent rescue package and planned the economic policy regime for each
Asian country in trouble. Still, some measures were taken based on the ASEAN regionalframework. The setting up of the Asian Monetary Fund (AMF), which Japan principally
worked to establish, was finally not successful, due to the objection of the US (Gilson,
2000). Later in May 2000, the Chiang Mai Initiative (CMI) was agreed, ‘which is the
network of bilateral currency swap agreements among ASEAN +3 (Japan, Korea andChina) countries, to address short-term liquidity difficulties in the region and to
supplement the international financial arrangements.’ In the same way, the Asian Bond
Market Initiative (ABMI) and the regional surveillance on economic policies started, but
the Chiang Mai Initiative (CMI) has been the main pillar of policy on the Asian level tocope with the Financial Crisis.
Is the Asian Financial Order and Economic Integration developed?
We have already examined how the long-term framework for coping with the crisis in
Europe will be built. How about in Asia? In addition to the short-term measures takenin Asia, which are mentioned in the previous paragraph, what long-term framework has
been developed for an institution to prevent a future crisis in Asia?
First, the framework of the Chiang Mai Initiative developed and worked efficiently inorder to prevent the crisis or prevent the contagion of the crisis, from external shocks
such as the Lehman Shock or European Crisis. In other words, it originally started as acrisis facility and then developed as a permanent facility to prevent a future crisis in
Asia. In line with this development, the multilateralization of CMI (CMIM) started, inwhich bilateral swaps were converged to multilateral swaps, and at the same time thetotal size of the facility increased (Park, 2012), in order to strengthen its effectiveness inthe financial markets.
Second, the Asian Bond Market Initiative (ABMI) started and developed. It is based on
the idea that one of the reasons why the Asian Crisis was so serious was that thebanking sector was too dependent on Asian financial markets. Asian banks, typically in
Thailand, received huge inflows of money from outside the country and arranged loans
too easily to inefficient sectors such as the real estate sector. As the banks’ evaluationsof borrowers became overly generous and the loans seemed unlikely to be repaid,
10overseas market participants started to worry about the situation and retreat fromlending money to Asian banks. If the bond markets had been developed, the investment
behavior might have been more rational, as investors would know where theirinvestments had been allocated and the details of the investments. Based on these
discussions, new frameworks of the Asian Bond Market Initiative (ABMI) weredeveloped by the finance ministers of ASEAN+3, leading to the Asian Bond Fund (ABF)
starting from 2003, which invests sovereign and other kind of bonds, and the ASEAN +3 Bond market Forum, which coordinates the regulations of bond markets in Asia andother issues (Park, 2012). Still, the development of bond markets in Asia is an ongoingand gradual process.
Third, regional surveillance of economic policies was also being considered at the timeof the crisis through the Economic Review and Policy Dialogue (ERPD), in relation with
the Chiang Mai Initiative. Such frameworks on regional surveillance of the economic
policies of ASEAN + 3 countries continued and the Regional Comprehensive Economic
Partnership (RCEP) is under discussion to improve economic integration through active
trade and foreign direct investment until 2015 (METI, 2012). Still, on this issue of
economic surveillance or integration on economic policies, the ASEAN +3 area can bedivided into two areas, ASEAN and Eastern Asian Countries, Japan, Korea and China.
Among the ASEAN countries, such discussions have been held for a long time, whichshould become a base for all ASEAN+3 regions. On the other hand, among the three
Eastern Asian Countries, economic integration through active trade and foreign direct
investment has been on the agenda but discussion has been hampered by politicalissues, especially on the island territory issues, between Japan and Korea, and between
Japan and China. Therefore the success of RCEP will largely be based on the integrated
framework that has been achieved up to now in ASEAN and the important question will
be how far the three Eastern Asian Countries, Japan, Korea and China, will participate
in the discussion positively and flexibly.
Of the Chiang Mai Initiative, the Asian Bond Market Initiative (ABMI), and theRegional Comprehensive Economic Partnership (RCEP), the Chiang Mai Initiative has
worked not only as a framework, but also, afterwards it has continued to develop andstrengthen its functions, it has been working as a permanent framework to prevent
crisis in the region. The other frameworks are still under development.
Even though the Chiang Mai Initiative has become a permanent framework, because its
function is to provide funds to problem countries it will be useful to prevent or cope witha financial crisis, especially caused from outside the area, but it will not necessary
survey and correct structural problems caused inside the area.
Why is the present situation of the framework in Asia like this? First, although the
Asian countries suffered economically from the Financial Crisis, most of them recovered
strongly, because they are rapidly developing countries with high quality labor forces11and relatively low costs and also because the depreciation in their currencies during thetime of the crisis contributed to the recovery of their export thereafter. So it was notessential for the Asian countries to discuss a further integration process, especiallyinvolving the coordination of economic policies.
Second, the political disputes, especially in East Asia, hampered progress in discussions
on the integration process. Also, the discussion on the Asian Currency Unit (ACU),
which would pave the way for the Asian single Currency, was hampered by the disputeon the initiatives in this area among the three countries in East Asia.
Even though the Chiang Mai Initiative has a successful framework, it should be
reinforced by the other frameworks for the capital markets and the economic policy
surveillance in the region. These frameworks as a whole, may work as institutions thatare sufficiently credible and self-reinforcing to prevent the crisis and contribute to thefurther integration process in the region.
The implications for the role of Japan
Finally, as an appendix, we discuss the implications for the role of Japan, to contributeto the stability of both the European and the Asia regions.
First, concerning the short-term measures to cope with the Euro Crisis, Japan
contributed directly and indirectly. Directly, ‘Japan has been purchasing European
Financial Stability Facility (EFSF) bonds.’ In addition, in January 2013, the Japanese
Ministry of Finance announced the purchase of bonds issued by the ESM. Indirectly,‘Japan has been working through the IMF,’ for example ‘Japan assigned $100 billion tostrengthen the firewall after the Lehman shock and Japan signed a $100 billion
Borrowing Agreement with the IMF in February 2009 ’ and ‘the EU can use this money
to support Euro member states in financial trouble’ (Tanaka, 2012).
But as we argued previously, the EU and the ECB played the main role in coping withthe crisis and from outside the Eurozone the IMF and major countries such as the US
and Japan played a complementary role.
On the other hand, to strengthen economic relations between Japan and the EU / theEurozone for the long-term, discussions on a FTA between the EU and Japan werestarted in November 2012 in the EU3. Even though there is opposition on both sides, forexample the agricultural sectors in Japan and the automobile sectors in some countries
in the Eurozone, it will pave the way for a new era in economic relations between Japan
3.

The FTA negotiation between Japan and the EU is an important issue that remains to be discussed onanother occasion. Japan’s positive attitude towards a FTA with the EU has been largely affected by the alreadyexisting FTA between the EU and Korea. As the industrial structure of Japan and Korea similar, in that theirindustries both concentrate on the automobile and electronics sectors that the FTA between the EU and Korea has
been very beneficial for Korean companies compared to Japanese companies.

12and the EU. The main issues have been the series of trade conflicts since World War II.
While overall agreements to collaborate proved ineffective, such as the Action Plan
based on the Hague declaration in 2001 (Berskofsky, 2012), the FTA may improve
economic relations between Japan and the EU substantially.
Next, on the measures to cope with Asia, even though there has been some criticism
especially from Europe, that Japan did not contribute to the recovery of the EU from thecrisis, the Japanese government did make various efforts to contribute to the recovery of
Asian countries, in addition to the plan of the Asian Monetary Fund (AMF), the Chiang
Mai Initiative and Asian Bond Initiative (ADBI) as already mentioned (Gilson, 2001).
In the long-term, the key question will be how Japan can contribute to thedevelopment of ASEAN + 3 as a credible, self-enforcing institution. Toward this end,
how Japan will work intensively toward the RCEP, as has already been discussed, inwhich the coordination of economic policies are supposed to be discussed and theintegration of the internal markets in Asia, will be the key issue. In this regard,
considering the difference in the stage of economic development in Asian countries, it isprudent to develop bilateral discussions between the countries in Asia on the FTA andthe development of FDI.
Finally, in discussing this long-term framework, a comparison with ASEM is useful. An
institution develops historically depending not only on the starting point but also on
how its itinerary evolves. ASEM started between the EU and ASEAN+3 as an informal
body in 1996, mainly for economic discussions. The economic miracle of Asia wasalready apparent in the early 1990s, so ‘the rise of the economic potential of the Asian
region and its growing markets attracted EU member states to participate in ASEM in
1996.’ Directly afterwards, in 1997, the Asian Financial Crisis broke out. As a result,
ASEM had become a useful framework for discussing how both parties should cope withthe crisis. Based on these discussions, once the framework of ASEM was established, it
worked as a multidimensional institution, ‘devoting equal weight to political, economic
and cultural issues’ (Gilson, 2001).
Conclusion
In this article we discussed measures to cope with the crisis in Europe at present andin Asia in the 1990s.
First, we classified measures to cope with the crisis into two categories: short-term
measures as an urgent remedy; and long-term measures to prevent a future crisis andstrengthen the present economic and political frameworks. Second, we examined
whether the long-term measures can develop to become established as credible andself-enforcing systems, as institutions that then develop historically.
Based on these two criteria, we analyzed the current situation, first in the Eurozone.
Even though the European Crisis is still on going, the urgent measures to cope with the13crisis taken by the EU and the ECB have been effective. On the other hand, thelong-term measures to achieve further financial, fiscal and economic integration are
only just beginning, with decisions being made on the road map and further discussions
towards the end of 2012.
Among the various short-term measures taken in Asia that were planned during thecrisis in the 1990s, the most successful framework was the Chiang Mai Initiative,
arranged among ASEAN+3 countries. Since the Chiang Mai Initiative is a framework toprovide funds to member countries, it was useful not only to provide urgent short-term
measures, but also for the long-term to prevent a future crisis. Therefore it wasstrengthened and developed. At the same time, it only covers the arrangement ofproviding funds to member countries and no further integration in ASEAN+3 has beendeveloped. So in order for ASEAN +3 to become an institution, further discussions
especially on the coordination of economic policies and the integration of markets in
Asia are required.
Finally, as an appendix, we consider the implications of these discussions for the role ofJapan, to contribute to the stability of the regions both in Europe and in Asia,
both for the short-term to help resolve the crisis and the coordination of economic
policies for the long-term. In this regard, free trade discussions will be the key forJapan’s relations both with the EU and Asia.
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