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Swinging euro raises doubts over future of India's trade with Europe

Gurdip Singh in New Delhi

Should the euro, the single currency of Europe, be written off? Is there any way to stop the euro in its tracks? Why should India bother so much as to what happens to the euro?

Many experts in India and abroad are describing euro as a 'flop story', which has been steadily declining since its inception at the beginning of the year.

The fall is all the more notable since it contrasts with the official bombast at its birth. At that time, amid triumphalism there were genuine concerns that an overstrong euro might undermine European competitiveness. The possibility of a near collapse of the euro was not considered at all.

Others think that the euro's outlook may not be that gloomy. They argue that the fall of the euro by about 13 per cent against the dollar since its launch on January 1, 1999, was by no means a structured indictment of the euro as a weak currency.

They believe that the pressure of global economic competition, the development of deep financial markets and the positive example set by fast growing euro members such as the Netherlands and Spain bode reasonably well for the Euroland.

The emergence of large and deep capital markets will lead to a more efficient use of capital, adding to pressures for structural economic changes that should help the euro to emerge as a solid currency.

They cite the sharply rising employment and the much improved profitability of large listed German companies as examples of growing labour market flexibility in the 11-nation euro area. They say that the single currency has helped cushion the shock to euroland of Russia's financial crisis and the Balkan states.

The problem, therefore, really is not the euro, but the European economy. The weakness of the Euro is more a reflection of the European economies underperforming than a cause of it. Thus the euro is weak because the European economy is weak. At least some parts of it are weak.

Something about the better ones. Both Germany and Italy have excellently run companies. There are global giants in Germany and medium-sized powerhouses in Italy. However, in both these economies, demand has been slow to grow. Some experts argue that they need lower interest rates to push their economies ahead.

France is another country which will manage reasonable growth this year. Some experts are of the view that France can live with its present interest rates.

Other countries such as Spain and Ireland need higher interest rates to stop their boom getting out of control.

The medium-term outlook of the euro will, however, hinge on a few issues and policies, experts say.

Economists have argued that Europe desperately needs a consumption-led recovery. Europeans need to liquidate their savings and spend more in the near future.

Liberal economists believe that most European countries require public sector reforms which will bring them in line with the United States and the United Kingdom practices.

The said truth is that Germany, France and Italy have created no new jobs in the past 20 years. In contrast, the United States employment is up 32 per cent.

Another crucial question is the extent to which the European companies can extract more efficiency from their plants, the original promise of the euro.

In fact it is the euro that has engaged in competitive devaluation. Unwilling to get engaged in the deregulation of the labour markets that international organisations like the Organisation of Economic Cooperation and Development advocate for jobs and growth, governments such as Germany have quietly welcomed the devaluation as it helps their exports.

Economists argue that such a policy has only short-term benefits and considerable long-term costs.

Euro is of considerable significance, says Mukesh Arneja, a Rotarian and a euro expert in New Delhi. The first and foremost is India's trade with the European Union.

Arneja says the European Union is the largest trading partner of India. About 27 per cent of India's exports go to the EU while India obtains 29 per cent of its imports from the EU. India's market-share in the EU trade is below one per cent and this indicates that there is considerable scope for exports.

Arneja said over a period of time, Libor, which is the benchmark interest rate for internatioinal lending, may be replaced by euro rate for inter-bank lending. Similarly, a Europe-wide stock market will develop and will result in a common trading system comparable to that of the New York Stock Exchange. In short, the structure of international financial markets will undergo substantial changes with the progress of the euro.

He says whether euro will become an international currency and rival the US dollar will depend on a few factors. This includes whether the euro possesses the characteristics of an international currency namely:

• Whether it is a transaction currency and is widely used in the statement of international payments.
• Whether it is an investment currency, that is, it is widely used in international borrowing in a variety of debt instruments.
• Whether it is reserve currency, that is a currency in which foreign exchange reserves are held by a large majority of central banks in the world.

''It seems too early to say what the role of euro is likely to be as an international currency, much will depend on the reforms Europe undertakes,'' says Arneja.

UNI

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