The impact on Pakistan economy
By 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 future.
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 euro.
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 partner.
Stability and dependability
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 every day.
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.
Learning from Euro
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.
History of Euro
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 Community (ECSC).
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 countries.
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 'Drachma'.
On January 1, 2002 Euro was launched as the cash currency in the eurozone.