A 'rupee area'

Poet, orator, consummate politician, visionary. Prime Minister Atal Bihari Vajpayee is a man of many parts but few would have suspected him of having the ability to put the cart before some 20 horses.

His suggestion that South Asia should think of working towards a common currency begs so many questions, and ignores so many prior requirements, that it can only be described as a pipe-dream.

We should do what the EU has done, said Mr Vajpayee, rather overlooking the fact that it took Europe 300 years of practically continuous warfare and revolution and 40 years of economic integration, to accept the idea.

India and Pakistan are still at each other's throats, not to speak of tensions with Bangladesh. And even though two years have passed since the euro was born, Britain and many other countries have chosen to not join Eurozone.

The reason is simple. For currencies to unite, many pre-conditions need to be satisfied and a clear set of benefits need to follow.

The basic pre-conditions are at least two. First, there must exist a huge amount of trade between those proposing to join the union because different currencies increase transaction costs for firms.

This is what had happened in Europe by the end of the 1980s and it was one of the main arguments at the Maastricht meeting (which resulted in a Treaty) where the then 12 members of the EU endorsed the idea "" with a deadline that was nearly a full decade after economic integration in other ways (common standards, for instance).

Second, investments between the countries must also be huge because then the same reason comes into play. Trade and investment thus reinforce each other in the push towards a single currency.

These two requirements mean a level of economic integration where a coordinated fiscal policy becomes possible.

But Pakistan has not even given India most favoured nation status when it comes to trade (which therefore takes place via Dubai!), and despite the passage of years, the proposed South Asian free trade area is nowhere in sight.

There are no official capital flows between India and Pakistan. Even in integrated Europe, the agreed fiscal limits have been breached and now raise questions about what is to be done.

In the South Asian context, therefore, it is nothing more than a flight of fancy to talk in such terms, and certainly provides no roadmap for action on the ground.

Likewise, the stream of benefits must also be clear. One obvious benefit is that a large and unified 'domestic' market makes it possible to reap the benefits of scale economies without having to depend on exports and foreign investment to make up for shortfalls in domestic savings.

Second, it becomes possible to move financial resources across boundaries without arbitrage adding to costs and volatility.

Third, it allows a region to compete more effectively against the rest of the world, both in political and economic terms.

But South Asia is light years away from all this. A region that can't even get a free trade zone going should not begin talking about a currency union.

Mr Vajpayee should have paused to consider the consequences of making improbable suggestions. The short point is that there is a time and place for everything.