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t is widely perceived that the 2010 eurozone crisis has somehow outweighed the benefits of financial integration, since coordination between member countries was arguably poor. For instance, France seemed reluctant to cut its budget deficit to 3 percent of gross domestic product (GDP).

Although Germany was ready to slash its budget deficit, it required France to do so beforehand. If France was frustrated by German austerity, Germany was also frustrated by French reluctance to reform.

Such issues were not surprising. Since each country has its own priorities, fiscal management tends to differ from one country to another. Unfortunately, the EU member countries no longer have independent monetary policies to align with different fiscal policies. Instead, no effective fiscal coordination has been in place, whereas in times of crisis, some solvent countries are required to assist other insolvent countries.

Even if fiscal coordination mechanism exists, there are at least two important drawbacks.

First, most member countries are not willing to be intervened in beyond fiscal deficit rules. This also means that they cannot sacrifice sovereignty over their own budget management to solve other countries'€™ defaults.

Second, although each member country generously helps fellow member countries, moral hazard also lurks behind the fact that each member country believes that it will be helped by others in case of default.

Consequently, countries will manage fiscal policies imprudently without worrying too much about macroeconomic risks and fiscal crisis. Greece, Italy and Spain have provided evidence on the occurrence of moral hazard, including from excessive borrowing to finance unproductive spending.

In the ASEAN Economic Community (AEC) context, what lessons can be learned about financial integration?

Essentially, several initiatives enacted in the AEC blueprint are still in the first phase of integration, which is a liberalization phase. It comprises: financial services liberalization, capital account liberalization, capital market liberalization and harmonization in payment and settlement system.

The second phase of integration is the creation of a single market for financial products, while the third phase is to establish a monetary union.

While the first phase is achievable with great commitment from ASEAN leaders, challenges to the second phase remain substantial with regard to the financial deepening sector gap and, to a lesser extent, the financial sector efficiency gap.

The former is important to ensure that the real sector across ASEAN receives sufficient financing from the banking sector as the dominant financial sector, to remain productive to compete together with other countries outside the region, such as China, which has started to penetrate Africa and Latin America.

The Global Financial Development Database (GFDD) reported that the financial deepening gap was still substantially large at least in ASEAN-5. If the credit-to-GDP ratio in Malaysia reaches approximately 120 percent, Indonesia still lags behind with the credit-to-GDP ratio of 20 percent on average.

The latter is also important to influence how pricing of financial products in one country can be accepted in other countries.

Narrowing efficiency gap will also enable the banking sector in one country to penetrate other countries in the region and hence, the ultimate goal of narrowing financial deepening gap can be achieved.

Interestingly, the GFDD for ASEAN-5 shows that the gap in the cost-to-income ratio as bank efficiency indicator is already narrow at approximately 40-60 percent across ASEAN-5 members. Although this gap continues to converge, regulatory harmonization should continue to cut the efficiency gap in the broader context of ASEAN.

Once financial deepening and efficiency gaps have been dealt with, the second phase of financial integration will likely run smoothly. The ultimate challenge will be how to achieve the third phase of financial integration, which is a monetary union '€” with or without a single currency.

As part of the monetary unification processes, the Chiang Mai Initiative Multilateralization (CMIM) is indeed a good example of mechanisms to deal with short-term liquidity problems associated with foreign reserves needs in ASEAN.

Extending the scope of CMIM to cope with short-term liquidity shortages in the banking sector is worth considering, so that a cross-border banking crisis can be avoided.

Yet, financial deepening by the banking sector plays a critical role in enabling the second phase of integration to run smoothly.

Likewise, ASEAN should not follow in the footstep of the EU. The '€œimpossible trinity'€ suggests that a country cannot exercise three strategies simultaneously: free capital movements, independent monetary policies and stable exchange rates. Only two of them will work.

Since ASEAN countries still need a large amount of capital to boost real sector development and competitiveness, undertaking strategies to limit capital movement is clearly not an option.

Giving up on the strategies of exercising independent monetary policy is also not an option, because it will require strengthening of fiscal coordination.

The EU experience has shown how difficult it is to make fiscal policy coherent across countries, particularly in times of crisis.

Eventually, ASEAN can give up on the establishment of a single currency, although achieving a monetary union remains feasible in ASEAN without single currency. There is no need to have a single currency to make uniform exchange rates between ASEAN member currencies and other currencies outside the region.

Although stable exchange rates are indeed necessary for each country to achieve its own objective, enabling each country to exercise its own monetary policies independently is more than sufficient to deal with exchange-rate fluctuation.