impact on Pakistan economy
SYED M. ASLAM
Mar 18 - 24, 2002
The launching of Euro as a cash currency on January
1 this year into the wallets, cash registers and financial
institutions of some 300 million people in the twelve member states
was a historic event indeed. It marked the introduction of a new cash
currency, dubbed by many as Europe's single currency, the ripples of
which would be felt across the globe in near as well as distant
Germany, France, Austria, Italy, Spain, Luxembourg,
Greece, Ireland, Finland, Belgium, The Netherlands and Portugal —
introduced the paper version of Euro as electronic and accounting
currency three years ago on January 5, 1999. Greece joined Eurozone on
January 1, 2001 saying that it had few regrets at the demise of
Drachma — Europe's oldest 2,650 year-old currency.
Euro performed strongly against the US Dollar on
its first trading day on January 5, 1999 rising to 1.19 against the
dollar showing the willingness of the currency dealers to accept the
new currency. For three years till January 1 this year the twelve
countries, affectionately called the 'Eurozone', had fixed euro
conversion rates against the respective national currencies. The
financial statements issued by corporate sector in these countries
were reported in euros.
The smooth launching of Euro as a cash currency in
the twelve member countries from January 1 this year and the
willingness to use it as legal tender by some 300 million people in
the European Union (EU) demonstrates its acceptance. However, euro's
supporters are interested to go beyond the acceptance phase to turn
euro into an international currency as widely respected and used as
the US dollars.
While euro fell below dollar parity on December 3,
1999 and since has shed its value trading at 0.87 cent at present, the
changed post-September-11 world offers many benefits. Many believe
that the Islamic world would play an extremely important role to give
euro the boost it badly needs by transfer of funds from the US to
other locales and preference to convert a substantial portions of it
in euros. The US ever expanding 'war on terror' to other countries and
regions comprising many Muslim countries, the freezing of assets of
many Muslim charities and foundations, the endless investigations, the
detention of thousands of persons the vast majority of whom are
Muslims, and an overall impression in the Islamic world that Muslims
are the butt of the US anger may result in unannounced support for
While Britain, Denmark, Sweden and Switzerland have
thus far holding on to their own currencies there is a line up
candidates who are anxious to join the Eurozone. Eurozone will have
ten new member states by 2004 and recently the EU foreign ministers
have given indications of a broad agreement to spend billions of euros
to them. The negotiations to pave the way for the entry of these new
members are expected to be finalised by end this year and the EU Prime
Ministers estimate that the cost of enlargement will be 40.2 billion
Euros ($ 35.4 b). The money would be used to bring the economies of
the candidate countries closer to Western European standards. However,
as a pleasant surprise the cost of the enlargement will be cheaper
than envisioned in 1999 when only six countries were expected to join.
As the 300 million people of the Eurozone are
getting used to feel and trade euro as the cash currency the potential
of it becoming an international currency and a serious contender to
dollar has already started taking shape. While the countries in Asia,
particularly those in the Middle East, Far East and Central Asia,
which are traditionally linked to dollar seem less inclined to use
euro overseas, countries closer to continental Europe have shown
willingness to use it overseas. This is best evident from the use of
euro for the first time at Haj, the annual pilgrimage of Muslims to
Holy cities of Mecca and Medina, in February this year. Saudi Arabian
money changers traded euros alongside dollars as pilgrims from EU,
Europe and North African countries brought euros instead of dollars
with them. Though the majority of over 2 million pilgrims brought
dollars to pay for expenses during their stay the event provided euro
a chance for an international exposure.
The Euro also has the capacity to influence the US
dollar directly as the bilateral trade between the two powerhouses of
the global economy totals a whopping 1.1 trillion or 1,100 billion
dollars. The bilateral trade tilts heavily in favour of the EU which
had a 55 billion dollars trade surplus with the US in 2000.
Some 15 billion notes worth over 630 billion euros
and 51 billion coins worth almost 16 billion euros were delivered to
financial institutions and retailers for the launching of euro as the
cash currency on January 1 this year, billed the E-day. Automated
Teller Machines across the Eurozone were loaded with the Euros and the
currency was transported everywhere with the Eurozone. While the
people in the Eurozone were allowed to use their respective national
countries they were given only euros in change during the first two
months of this year.
While euro has shed a quarter of its value against
the US dollar (trading at $ 1.18 on January 5, 1999 to 0.89 cents at
present) since it was launched three years ago the national economies
of the world have seen it fit to convert a portion of their foreign
exchange in euro. This include many developed countries and also many
developing ones such as Pakistan. So what kind of impact would euro
have on developing economies like Pakistan?
Although international business transactions in
eurozone have been conducted in euros for two years the availability
of coins and notes to the public starting this year, and the unified
exchange rate in a single market of 300 million people has also
influenced the countries who have snubbed euro. For instance,
one-third of all the shops located on London's business district
Oxford Street say they will accept euro alongwith pounds. Despite
Britain's decision to not to join euro the currency will be familiar
sight to millions of Britons which receive a large number of tourists
from the eurozone countries each year. In addition, a large number of
British tourists also travel to twelve eurozone countries each year.
The tourist trade would be the single biggest facilitator of
euro-pound interaction to influence the Britons and their government
to reconsider the decision staying off the eurozone. This is primarily
due to the fact that the money has a language of its own and trade,
business and retailers can hardly afford to say no to 'euro' if
tourists from eurozone want to spend euros in Britain.
The scenario is also valid for Pakistan which has
strong trading and investment ties with nations in the eurozone which
though varying from country to country make it one of the top trading
Talking to PAGE the former chairman of F.B.
Industrial Area of Karachi, Farooq Bakaly, said that Pakistan can not
yet totally depend on euro as a reliable currency due primarily to the
shedding of value against the dollar despite its strong performance
initially. "The bulk of the international trade still remain
linked to dollar and a small portion of it remain linked to Pound
Sterling while the rest of the currencies really don't matter."
He said that Pakistan can hardly be expected to
play a significant role to give a boost to euro as the base of its
foreign trade is a narrow 22 billion dollars — $ 12 billion imports
and $ 10 billion exports. He, however, said that the Muslim countries
should collectively support the euro in the changed global scenario of
today. "Billions of dollars belonging to the Muslim countries are
providing enormous buying power to the US and the realities of the
changed world today necessitates the need for converting of these
enormous funds into some other international currency. Euro happens to
provide the most viable alternative. The freezing of assets in the US
would encourage diversification of currency.
However, this will only take place if the euro is
stable to be deemed fit for conversion and until that happen dollar
would keep up reigning supreme as the premier currency of the world.
Only a stable euro will ensure its becoming an international currency
as widely used, accepted and respected as the US dollar.
"Not even 5 per cent foreign exchange reserves
in the world comprise currencies other than the dollar despite the
fact that London is the hub of international banking and insurance
industries, the two most powerful catalysts of capital market. Until
euro is stable enough to emerge as a competitive currency it would
offer no benefits to the developing countries like Pakistan or to play
the international role that its supporters want it to play.
Pakistan has not yet converted any of its foreign
exchange reserves into euro as evident from the quoting of currency
exchange and LIBOR rates in dollars."
While in theory the launching of Europe would have
helped ease the problems related to Pakistani exports to the EU by
abolishing the process of double conversion — the first from rupee
to dollar and the second from dollar to the now defunct national
currencies that has not happened. Farooq said that 'Pakistani
exporters are in fix due to appreciation of rupee against the dollar
on the one hand and the shedding of value by euro against the dollar
on the other. Prior to November last year German Mark was used to be
fixed on weekly basis however it is fluctuating since then almost
In addition to a small economy, the value of
Pakistan's trade with countries in the Eurozone totals between $ 2-2.5
billion or less than 12 per cent of its entire $ 22 billion annual
foreign trade. On the other hand, the US is the biggest trading
partner of Pakistan — $ 2.1 billion worth of exports and $ 2.5
billion worth of imports. Eurozone collectively is the second top
trading partner while the UK and Japan along with a handful of other
countries make up the remaining part of the foreign trade."
He said that the launching of euro as a single
European currency is more than a monetary decision and also has loud
political overtones the least of which is the show of unity. 'The
eurozone has a single currency, single government, unified visa
requirement policy and single trade-related quota procedures
exercising powers which go beyond finance and trade.'
Talking to PAGE, Owais Kalia of Khanani and
Kalia said that a weak euro-dollar parity is the main hurdle to adopt
euro as a parallel currency in Pakistan. "The dollarization of
the Pakistani economy has stopped after the September 11 events due
primarily of the concerns about the freezing of a number of assets in
the US and yet it has failed to benefit euro due to erosion of value
against the dollar."
Owais said that 'mini Europe' i.e. Europe can play
a prominent role to give a boost to euro if it choses to join Eurozone.
"If that happens, and polls show that 35 per cent of the Britons
favour to adopt euro, euro would be traded at par with the dollar. But
even if UK chooses not to join EU, euro will be performing much better
by the end of this year trading between .92-.95 cents compared to .87
cents at present. This would happen as euro is expected to benefit
from the repatriation of funds and investments currently held in
dollars worldwide in the changed realities of post-September 11. He
said that Pakistan has converted between 10-20 per cent of its foreign
exchange reserves in to euro.
He said that the elimination of the double currency
conversion in trading with the EU between 20-30 per cent of which
carried out in dollar equivalent of the respective currency has helped
minimize the inherent loss from the previous double conversion. The
launching of euro has not only resulted in standard currency
conversion but has also resulted in speeding up the transaction and
paper works at all stages of trade between Pakistan and EU members.
He said that the launching of euro offers immense
opportunities for the Pakistani IT industry to get orders from the
countries in the eurozone which need all types of software for the
change over. He said that KalSoft, an IT company of Kalia Group, has a
presence in Rotterdam's Euro Software Park which has a strength of 5
professionals in the front-end operations and many more professionals
in the back-end.
Both Farooq and Owais agreed that euro serves as a
model that can be successfully followed by one of the many
organizations of which Pakistan is a member. Owais stressed the need
for the Muslim countries to adopt a similar system of a unified
currency for free movement of capital and goods. Farooq said that
SAARC and OPEC can follow the euro model for the benefit of respective
economies and the people that they house.
Many feel that the idea of European single currency
can be traced back to Paris Treaty which was signed on April 18, 1951.
The treaty signed by France, West Germany, Italy, Luxembourg, Belgium
and The Netherlands agreed on establishing the European Coal and Steel
In March 1957 Treaties of Rome were signed by
Belgium, France, West Germany, Italy, Luxembourg and the Netherlands.
The Treaties covered the establishment of the European Economic
Community (EEC) and the European Atomic Energy Community (Euratom).
In December 1969, a Summit meeting held in The
Hague appointed the prime minister of Luxembourg Pierre Warner to
prepare a report on reducing the exchange volatility.
In October 1970 Werner Report was published. It
called for the centralization of the macroeconomic policies of the
member states calling for the total and irreversible fixing of parity
rates and complete liberation of the movements of capital. The report,
however, did not recommend the creation of a single European currency
or even a central bank
Between 1971-73, Europe experienced widespread
currency floats and devaluations due primarily to the breakdown of the
Bretton Woods system of fixed exchange rates which also dealt a
serious blow to shift to an European monetary union.
European Monetary Union was created in March 1979.
It was based on a currency unit called Ecu aimed to stabilize the
exchange rates of the national currencies and to counter inflation.
The Single Union Act was signed in February 1986.
It modified the Treaty of Rome to formalize political cooperation
among the member states. It included six new areas of competence
including monetary cooperation.
On June 14, 1988 EC leaders moved closer to
monetary study plan as EC Summit in Hanover tentatively agrees to
study closer monetary cooperation.
The Masstricht Treaty was singed in February 1992.
It elevated the project of European integration to a new and ambitious
level by setting a firm date — January 1999 at the latest — to
replace national currencies by a single, shared currency — the Euro.
Four months later in June Danes said 'no' to the Masstricht Treaty and
Denmark refused to ratify the treaty. A poll held in France voted
'yes' on September 21 but by an extremely narrow margin.
European Monetary Institute was created, the
precursor of the European Central Bank, and met for the first time on
January 12, 1994. On January 1, 1995 EU expanded as Austria, Finland
and Sweden joined it. In December 1995 EU backs Euro as name of the
single curremcy and EU leaders brace themselves for a tough three-year
campaign to win support for the planned currency in their respective
The European Central Bank was established on June
1, 1998. Euro was launched on January 5, 1999 and rose to 1.19 against
the dollar on its first trading day. On December 3 the same year Euro
fell below one dollar for the first time. The G7 nations stood firm on
Euro as leading central banks intervene to support an ailing euro.
On September 29, 2000 Denmark said 'no' to Euro
dealing a blow to the single currency. On January 1, 2001 Greece
joined the eurozone resulting in the demise of its historic currency
On January 1, 2002 Euro was launched as the cash
currency in the eurozone.