By Lee Myong-hwal

The eurozone fiscal crisis has shaken the global economy and financial markets as did the global financial crisis in 2008. East Asian countries cannot be immune from the impacts, but they also have drawn several valuable lessons from it that will serve them well going forward.

The first lesson was that whatever the cause of a crisis is, it brings bailouts and then eventually leads to fiscal problems. This recurrent pattern once again proved the importance of fiscal soundness. In case of Korea, during the currency crisis more than 10 years ago, the country’s fiscal soundness allowed its economy to bounce back quickly from the crisis. This is in sharp contrast to the fiscal position that Europe is in now, which is holding back the eurozone from doing the same.

The second lesson was that East Asia needs to institute capital controls. When the eurozone fiscal crisis started worsening in August 2011, the sizeable capital that had flowed into Asia suddenly reversed its course. To help absorb the shock from any similar disturbances in the future, the East Asian governments should restructure their economies so that sudden capital stops do not arise due to domestic weakness.

In addition, East Asian countries need to introduce similar measures like those adopted by the Korean government in 2010 and 2011 to moderate capital volatility, including a forward position limit system, re-imposition of withholding tax on foreigners’ bond investments, and macro-prudential stability levy on financial institutions.

But because emerging economies do not have a reserve currency of their own, country-level efforts alone would not be enough to address vulnerabilities from external shocks. Without an appropriate safety mechanism, emerging markets have little choice but to stockpile ever more foreign reserves, leading to greater global imbalances.

Given all this, the third lesson was that nations issuing reserve currencies should take active part in efforts to stabilize emerging economies' foreign exchange markets and establish the global safety net.

The fourth lesson was the need for East Asia to strengthen its current level of monetary and financial co-operation within the region. Building a global safety net is important, but regional cooperation is also necessary as complement to global cooperation. This includes strengthening the function of AMRO (ASEAN+3 Macroeconomic Research Office) and adopting a regional approach to moderating the risks of capital flow volatility. A regional safety net, such as the CMIM (Chiang Mai Initiative Multilateral), should be further expanded to complement the global safety net.

The last lesson was about Asian monetary integration. The eurozone fiscal crisis showed that monetary integration without fiscal integration would not work and that it would ultimately lead to a dead end. But as the developments in the eurozone have gone to attest, establishing firm fiscal integration requires a long and arduous process that seems rather impossible any time soon in the case of East Asia.

Besides, the economic gap between the regional countries are now simply too wide to implement the monetary integration. Rather than forcing the issue, East Asia should take a slow and step-by-step approach to creating its own regional monetary integration.