But EC Laments Inertia In Conversion To Euro

Written by Malcolm Subhan | Brussels, February 23: | Updated: Feb 24 2003, 05:30am hrs
Even when the Indian exporters to the European Union (EU) have begun to invoice their deals in euros, the currency of 12 of the 15 EU countries*, the European Union Commissioner feels, there is some degree of inertia in the use of the new currency for invoicing purposes. In other words, exporters in non-EU countries are sticking to the dollar-based invoicing.

The fact is that habits die hard. Take the Gulf and Southern Mediterranean countries, which have strong trading links to the EU, and enjoy very favourable access to the EU market. Even here the shift to the euro has been slow. Speaking at a conference in Athens earlier this month, the EU Commissioner could only lamely declare, The euro is likely to progressively expand its role as an invoicing currency, especially for our trading partners in the Mediterranean.

(EU imports from its southern Mediterranean neighbours came to some EUR 45 billion in 2001.)

The enlargement from 15 member countries to 25 should give the EU a fresh impetus. If so, the use of the euro, as an international currency, favoured by traders as well as investors, should rise dramatically.

Meanwhile, Indian banking sources here in Brussels say with each euro fetching more rupees than the US dollar, it makes economic sense for the Indian exporters to invoice their deals in euros. Importers, on the other hand, would prefer to be invoiced in dollars for, the exporters gain is their pain.

By the same token, Indian exports to the EU are higher when calculated in euros. Exports to the EU, Indias largest export market, came to $11.6 billion in 2001, and to $6.8 billion during the first six months of last year. But if you convert these figures into euros, then the total value of those exports was EUR 12.9 billion in 2001 and EUR 6.8 billion during the first six months of 2002!

The fact that the rupee has depreciated against the euro amounts to a competitive advantage for Indian firms exporting to the 12-nation eurozone. In economic terms the eurozone is no lightweight: it accounts for roughly 16 per cent of world GDP, as compared to 21 per cent for the US and eight per cent for Japan.

There are solid economic reasons for invoicing in euros when selling to the eurozone, irrespective of the euro/US dollar parity. The most important is a greatly reduced foreign exchange risk, which now relates to just one currency, the euro, rather than to each of the 12 currencies that the euro has replaced. Transaction costs also are greatly reduced through the use of a single currency.

Of course, the UK is still outside the eurozone. And it remains Indias largest export market in the EU. Exports to the UK amounted to Eur 3.0 billion in 2001, as against exports of Eur 2.4 billion to Germany, Eur 1.7 billion to Italy and Belgium and Eur 1.3 billion to France. The fact that the UK economy has been doing better than the eurozone economy means that the British are in no hurry to throw in their lot with the Irish and with continental Europeans.

Indian exporters appear to be bucking the global trend by invoicing in euros. This must be good news for the EU Commissioner responsible for overseeing the introduction of the euro, who lamented recently, There clearly is some degree of inertia in the use of a currency for invoicing purposes. This is particularly the case for oil, where the quotation itself is in US dollars, the commissioner added.

For various reasons the US dollar clearly remains the main international currency, certainly when it comes to invoicing foreign trade. Even so, the launch of the euro in January 1999, represented the biggest change to the international monetary and financial system since the Bretton Woods system ended in 1971. This is reflected in the gains the euro is making on other fronts. The euro has emerged as the second global currency since its introduction some four years ago. For example, by mid-2002 the euro accounted for 41 per cent of total outstanding international debt securities. This was considerably higher than the share of the EU currencies which the euro replaced, whose combined share was around 27 per cent in 1998.

Some 13 per cent of global foreign exchange reserves were held in euros at the end of 2001, according to the annual report of the International Monetary Fund (IMF). The share of the US dollar was 68 per cent, and of the Japanese yen, five per cent. From the EUs point of view, the benefits of the euro have yet to be fully appreciated by those responsible for official reserve management.

Just how fast the euro gains favour among international operators, whether those engaged in international trade or active on international financial markets, will depend in large part on two factors: the economic performance of the eurozone and the development of the EU single market, launched in 1992.

The latest reports from the eurozone are hardly encouraging, with industrial output falling sharply in two key eurozone economies, the German and French. But short-term fluctuations should be discounted, to the extent that the role of the euro as an international currency will be decided only in the long run.

The euro must also be viewed in the context of the European single market. This is the process which the 15 EU countries set in motion on 1 January 1992 in order to create a single market, free of internal borders, which benefits both businesses and citizens. The single currency, the euro, is therefore an essential element of the single market, ensuring its success.

Business, too, is on the whole satisfied with the operation of the single market. Businesses in the smaller countries, not surprisingly, perhaps, are keener on the single market, because it allows them to reach out to customers outside their domestic markets. As a result, many companies are beginning to feel the effects of extra competition on their home ground - and are doing more to increase productivity.

Are the single currency and the single market the latest in an on-going programme designed to transform the EU into a USE - or United States of Europe The EU certainly is trying very hard to catch up with the US, not simply in terms of GDP but also of innovation, entrepreneurial drive and economic dynamism.

The enlargement from 15 member countries to 25 should give the EU a fresh impetus. If so, the use of the euro, as an international currency, favoured by traders as well as investors, should rise dramatically.