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Euro will take on dollar, gear up, France tells India

The introduction of Euro currency from January 1 next year will be a major competition to the US dollar in the world trade simply because of the size of Euro land and its trade turnover, according to Jean-Rene Bernard, member of the Monetary Policy Council of the Banque de France.

Making a presentation on the European Monetary Union as well as the concept of Euro currency to Indian bankers, industrialists and exporters in Bombay today, Bernard said that the Euro would act as a magnet for countries applying to join the European Union and would draw the currencies of African nations also that were now linked to the French Franc.

''We will witness the phenomenon of Euroisation in place of the current dollarisation,'' he said.

He said that many large corporations had decided to draw up their accounts in Euro mainly to immunise themselves against the exchange rate risk. While an observation period would probably be necessary before significant changes take place, in certain areas such as aeronautics, the Euro could perhaps compete with the US dollar as a billing currency, he added.

On currency and financial transactions, Bernard said that the volume of Euro currency transactions would be about 40 to 50 times higher than that of the financial transactions linked to international trade.

The predominance of the US dollar is particularly apparent in issues of long-term securities. Right from the creation of the Euro, the bond issues of the countries concerned will provide a sufficient critical mass. The factor that would determine the spread and speed of the internationalisation of the Euro should be transaction costs on the foreign exchange markets and especially on securities markets.

Bernard cited internal stability, low inflation, existence of a broad and liquid securities market as reasons for successful integration of European currencies into one strong international currency to challenge the dominance of US dollar.

The strong economic foundation of European Monetary Union would act as a stabilising factor during transition and the participating countries would be agreeing on a convergence in respect of fiscal policy as well, he said.

UNI