ryuzo miyao : eurozone crisis – implications for asian economies initial remarks by mr ryuzo miyao, a member of the policy board of the bank of japan, for the panel discussion at the asian development bank institute, tokyo, 12 october 2012. * i. * * introduction i am honored to be invited to this panel discussion at the asian development bank institute. in discussing today ’ s topic, “ the eurozone crisis and its implications for asian economies ”, i would like to speak briefly about three key aspects. i will begin with reviewing the current eurozone crisis, then consider its implications for asian economies, and lastly i will outline the bank of japan ’ s contribution to regional monetary cooperation in asia. ii. nature of the eurozone crisis i am sure that most of today ’ s audience is already familiar with developments in the current eurozone crisis, but i would like to emphasize two points about the nature of the crisis. the first is that the eurozone crisis highlights the difficulties of so - called monetary union without fiscal union. eurozone countries introduced the single currency, the euro, under the european central bank, while each member country maintains its own fiscal sovereignty. however, there have been ongoing intensive discussions, since even before monetary union began, especially in academic circles, about the necessity for an adjustment mechanism in the form of fiscal transfers, labor mobility etc., if a common currency is to work. thus, the issue of how to manage fiscal policies under a single currency regime is one of the most fundamental and most enduring challenges for the eurozone. second, as long - term interest rates in member countries converged at low levels following the introduction of the single currency, the eurozone enjoyed the benefits of the expansion of trade and investment. at the same time, however, it also gradually accumulated economic and financial imbalances, such as loose fiscal spending and a bubble in the real estate market. because these imbalances were built up over a period of more than a decade following the introduction of euro in 1999, it would not be surprising if it takes a long time for the eurozone to achieve a full recovery. if this is indeed the case, we must be aware that there is a risk of the crisis becoming a severe headwind against the global economy in the longer - term perspective. i will come back to this point later. iii. implications for asian economies it took about 50 years, from the signing of the european coal and steel community treaty in 1951

the long - term interest rates of these countries went down toward the level of german government bonds and converged at low levels, which also stimulated the economy in the peripheral countries. at that time, market participants called this convergence of interest rates the “ interest rate bonus ”, and praised it as being “ the fruit of monetary union ”. in hindsight, however, this convergence of long - term interest rates encouraged loose fiscal policies, or combined with overly optimistic economic projections, led to real estate bubbles in some countries. meanwhile, necessary structural reforms were stalled, including labor market reforms, and the competitiveness gaps within the region remained unsolved. given that growth potential in asia is high and its middle - class is expected to grow further, asia must avoid over - heating of the economy such as excess investment or the creation of bubbles. this lesson should be relevant even when asia faces the downside risk associated with the eurozone crisis, because excessive short - term policy stimulus may increase the potential risk of these imbalances. in addition, even though economic growth is relatively high in the region, it is still important that asia makes progress on the structural reforms that are necessary for it to maintain this growth over the medium - and long - term. iv. bank of japan ’ s contribution to regional monetary cooperation in asia in the light of this discussion, i would like to outline the bank of japan ’ s contribution to regional monetary cooperation in asia. the european council and the european commission have played a major role in market integration in europe, through what we might call “ top - down integration ”. however, it seems to me that market integration in asia is moving forward autonomously through trade and foreign direct investment by the private sector, that is to say, through “ bottom - up integration ”. in light of this, central banks in asia are working together in promoting regional monetary cooperation to develop deep financial markets. the bank of japan also contributes to these undertakings. for example, the bank of japan is a leading member of the executives ’ meeting of east asia and pacific central banks, or emeap, an international forum for 11 central banks from the asian and pacific regions. under the umbrella of the governors ’ meeting, emeap has a number of meetings at different levels : the deputies ’ meeting, the working group on financial markets, the working group on banking supervision, the working group on payment and settlement systems, the it directors meeting, and the monetary and financial stability committee. to address