Dream come true: Euro is next only to dollar

Srikesh P Menon

The year 2002 saw the birth of the euro. The new currency has been years in the making. The Treaty of Rome (1957) declared a common European market as an objective with the aim of increasing economic prosperity and contributing to "an ever closer union among the people of Europe." The Single European Act (1986) and the Treaty on European Union (1992) built on this, introducing the Economic and Monetary Union (EMU) and laying the foundations for a single currency.

The third stage of EMU began on January 1, 1999, when the exchange rates of the participating currencies were irrevocably set. Euro area member-states began implementing a common monetary policy. The ‘euro’ was introduced as a legal currency and the 11 currencies of the participating member-states became sub-divisions of the euro. Greece joined on January 1, 2001. And in 2002, 12 member-states introduced euro banknotes and coins. The euro area currently comprises of Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland.

The euro symbol was inspired by the Greek letter epsilon representing the first letter of the word ‘Europe’. The parallel lines represent the stability of the euro. The official abbreviation for the euro is EUR, which has been registered with the International Organisation for Standardization (ISO) and is used for business, financial and commercial purposes.

"No doubt, the euro will reduce the dominance of US dollar in the world economy. Euro-zone will compete with US markets and provide alternative investment opportunities for the rest of the world. It is now a survival of the fittest between the US, Euro-zone, Japan, the UK and Swiss economic zones. It is clearly evident that the euro will give a run for the US dollar as a ‘safe haven’," says Centurion Bank’s executive director Moses J Harding. Mr Harding adds that there is bound to be a shift in investment flows from developing nations if the euro remains stable.

In the recent past, despite series of aggressive Fed-rate cuts, the dollar has continued to remain strong against all major currencies despite its economic woes. On the other hand, the euro has lost its value by nearly eight per cent on an annualised basis since inception, eroding the return on euro investments.

"However, things have turned better with currency volatility restricted within a band of 0.87 per cent to 0.92 per cent, a risk of 5.75 per cent," explains Mr Harding.

And the future? The economic fundamentals of euro zone are well under control as compared to the US with a clear edge on interest rate as well. But a recovery of the US economy and the much talked-about turnaround in 2002 needs to be seen. A bottomed-out scenario in the US Fed-Rate is also dollar supportive: to appreciate further in the medium- to long-term. Most do not see a major shift in assets from the US to Euro zone in the near-term, but the dominance of the US economy is clearly under threat.

Just how will the euro affect the local markets? "Not much will change in the Indian market except that tourists who go to Europe will not have to carry currencies of 12 different countries. This way the problem of conversion of exchange rate to local currency is eliminated and the handling of cash-euro and managing it will become a lot easier for the tourists," points out IndusInd Bank’s senior vice-president & head-treasury Sharukh Wadia. Mr Wadia also explains that not many banks have FCNR(B) deposits in euro: most of them have it in dollars. So not much effect is seen on that front also.

Mr Harding is of the view that "no tangible impact is to be seen in the near-term given the dominance of the dollar in India’s foreign trade. "However, immediate benefits will accrue to travellers to Eurozone on leisure and business. This will save the five per cent conversion margin on purchases and sales. The shift in trade flows to Euro zone in post Afghan crisis period and resultant lift of sanctions also need to be seen," says Mr Harding.

The benefit that has accrued to the 12 participants countries are obvious: smooth flow of goods and commodities within one another, uniform pricing and removal of exchange-risks. However, the impact on global economies will stay mixed and more pronounced for developed countries with a sort of cautious approach for developing nations. A lot depends on their economic performance as a single entity wherein Germany, France and Italy have a major role to play need to watch the translation of ‘political will’ into ‘economic sustenance.’

If this can be achieved in the near- to medium-term, Euro zone could emerge as an ‘Economic Super Power’ to dilute the dollar’s dominance in the financial markets.

Mr Hardings believes the chances are good and gives it a seven on a scale of one to 10 for the ‘dream-come-true’ performance of European policy.

"To wrap up, we can say that it may not be long before the euro takes the healthy second place in the circulation of hard cash, second only to the almighty US dollar," says Mr Wadia. Long live the euro!