FINANCE: The Euro, not the Monetary Macho Man

By Estrella Gutiérrez Reprint | | Print |

Estrella Gutierrez

CARACAS, Feb 25 1998 (IPS) - The new European Union (EU) currency, the euro will not burst onto the scene as the new “monetary macho man showing its muscles to prove its strength,” said Peter Bekx, the highest authority for the bloc in Venezuela.

“The euro will not be either strong or weak, but stable,” added Bekx, the Belgian head of the European Commission Monetary Union Unit.

The EC representative was speaking on the impact of the monetary reform of the euro on the global economy in the Central Bank of Venezuela as part of world-wide information campaign by the EU on the changes to be seen from 1999.

Next year, an as yet undetermined group of the 15 EU members will be entering into economic and monetary union, sealed with the launch of a new currency, the euro, substituting the national currencies of the bloc.

Bekx said Europe wanted to transmit the message that the introduction of the euro will mean changes for the international monetary system, not in “a sudden jolt” but a gradual process,” lasting until 2002.

The advent of the euro will also imply the creation of a European Central Bank to control of the monetary aspects of the bloc, and analysts say it will promote a tri-polar system “dollar- euro-yen” in world finances.

Bekx explained the impulse of globalised trade will lead to increasing weighting of the euro as an international currency. In fact, a single currency has been needed in the unified European market since 1992.

The euro will come into operation in the futures market, the exclusive domain of the dollar up until now, and will have an important role in the world financial portfolio as one of the main reserve currencies.

The impact of the euro will initially be seen in European countries outside the EU, which will feel the drop in transaction costs with nations of the bloc, using a single currency for payments and having an area of monetary stability as a reference.

But also companies from any part of the world entering into trade relations with the EU will rapidly feel the advantage of having to penetrate only a single market instead of the current 15.

“The costs of doing business with Europe are going to fall a vastly,” said Bekx, adding that the EU is already the leading world market, accounting for 21 percent of total trade, followed by the United States with 20 percent, and Japan, with 10.

Bekx said Latin America will probably maintain the inertia of the use of the dollar, while in Asia the new currency and the yen will retain a weighting lower than that of the US currency.

However, in both regions, the financial crisis unleashed in Southeast Asia in 1997 could change this situation around.

He said that, according to 1996 figures, 48 percent of the capital denominations, 40 percent of the portfolio and 38 percent of the exchange transactions are carried out in dollars.

European investments have been gradually moving away from the dollar and between 1985 and 1995 the share of world-wide transactions carried out in EU currencies increased from a quarter to a third of the total.

But the importance of the euro in the investment portfolios will increase slowly, said Bekx, because it will initially have to prove its credibility and this will only occur as it demonstrates real stability over time.

In any case, Bekx recognised there would be a “domino effect” which will make the use of the euro more flexible. The big companies of all the EU countries said that from 1999, all their billing, charges and payments will be in euros, which will make all their suppliers do the same.

Debts contracted with European countries in their own currencies will be changed over to euros, at the exchange rate set for each currency, while the rest of the conditions will remain the same, except that contracts will expressly state the new interest rate will be observed with the arrival of the euro.

Those most alarmed by the effects of the euro are the US analysts, who are forecasting “horrors for the leading world currency,”the dollar, said Bekx.

Their sombre analysis is based on the fact the European central banks are sitting on enormous masses of reserves they will no longer need, which could mean they release a quantity of dollars onto the market provoking a dramatic fall in its parity with the euro.

Bekx said on average the coffers of the EU central banks are seven times as big as those of the US Federal Reserve, and double those of the Central Bank of Japan.

With the advent of the euro, large reserves will no longer be needed to keep transactions between the Community currencies stable.

“The European Monetary System will find itself with a mountain of reserves it does not need,” he said.

But the national central banks which continue to operate under the umbrella of the European Central Bank will, in his opinion, maintain the “hyper-cautiousness which is in their nature.”

The result is that it will move away from the dollar gradually, much as it left behind gold in the seventies when this abruptly stopped being a monetary standard.

Bekx stated that gold has lost its value as a reserve, and it now only has a future “in jewellery.”

And just as he rejected the theory the euro will show “macho behaviour, with gestures like high internal rates to build its credibility on the basis of strength” he also discarded the inverse hypothesis: that its initial tendency will be as a weak currency.

This forecast is based on the fact that countries with weak economies like Spain, Italy and Portugal will participate in the single monetary system from the beginning.

Bekx said these countries could have been unstable in the past, buthat they would not be in future because in order to enter the euro they must fulfil established demands for low inflation, a low fiscal deficit and exchange stability.

Some of those who will have less need to travel to the EU nations will be, for example, officials from the International Monetary Fund.

They will no longer have to visit the 15 members to supervise their economy once or twice a year, for a single mission to the European Central Bank in Frankfurt, Germany, will be able to do this.