10 - 16 January 2002
Issue No.568
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Al-Ahram Weekly Online 10 - 16 January 2002 Issue No.568 |
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First impression
In the wake of the euro's debut, Nabil Hashad* assesses the impact on Egypt and the world
On 1 January 2002, the EU took a major step toward economic, monetary and financial unity. The euro is no longer a concept. It is a fresh and crispy banknote; one that will replace 12 powerful currencies by the end of February of this year; one that has assumed the number two spot in the currency market, just behind the mighty dollar. The launch of the euro crowned efforts that began with the Treaty of Rome in 1957. Since then, Europe has experimented with a free trade zone and a customs union before graduating into more emphatic forms of union: the Common Market and other forms of integration like those in the Maastricht Treaty. The euro was not the first single currency envisioned by the EU. The ecu (European Currency Unit), the euro's predecessor, remained a scriptural currency, a mere accounting tool.
With monetary history being made, questions abound about the implications of this move for Egypt and the world. Will the euro change the structure of the international monetary system? Will non-EU countries be tempted to link their currencies with the euro? Will the euro challenge the US dollar for currency supremacy? Will Egypt abandon the dollar peg for a euro-based one? Would this, in turn, affect Egypt's foreign trade and banking operations?
The replacement of the ecu by the euro a few years ago marked a new phase in Europe's monetary integration efforts. Between 1995 and 1999, foreign direct investment (FDI) among EU countries increased five- fold. In 2000, it increased, yet again, by 50 per cent. FDI among EU countries now stands at an unprecedented 25 per cent of their total FDI. The introduction of the euro has helped intra-EU trade to increase to account for 50 per cent of EU countries' foreign trade. (Intra-Arab trade, by comparison, stands at a mere 8.5 per cent of Arab countries' total foreign trade).
The euro has increased liquidity within the EU, stimulated EU financial and monetary markets, reduced transaction costs and eliminated currency risks. These achievements reinforced the EU's status as a key global player. Yet the euro has not yet posed a serious challenge to the dollar's status as the world's supreme currency. Since Bretton Woods, the 1944 agreement that gave birth to the International Monetary Fund and the World Bank, the dollar has dominated the international monetary system. Today, 67 per cent of international monetary reserves are in dollars, compared to 13 per cent in euros. About 50 per cent of international securities are issued in dollars; compared to 30 per cent in euros. Just over 40 per cent of international bank assets are held in dollars, compared to 27 per cent in euros.
For a relatively young currency, this is quite impressive, but there is no sign that the euro will be unseating the dollar from the top spot any time soon. "The dollar is the unchallenged currency leader," admits Ernst Welteke, president of the Deutsche Bundesbank.
The recent signing of an Egyptian-EU partnership agreement makes the euro a focus of attention for domestic decision-makers, particularly economists and bankers. About 40 per cent of Egypt's foreign trade is conducted with the EU, making it Egypt's main trading partner. It is, therefore, tempting to argue that the euro, not the dollar, should be used as a peg for the Egyptian pound. This argument, however, has some pitfalls. For one thing, it is risky to peg the national currency to a single foreign currency, regardless of how powerful it is. Besides, the dollar is still more eminent than the euro. Perhaps the best idea would be to peg the Egyptian pound to a basket of currencies in which both the dollar and the euro are given considerable weight. For bankers and investors, the introduction of the euro must be a welcome step because it reduces the risk of currency fluctuations and minimises the cost of transactions and transfers.
* The writer is the director of the Arab Centre for Financial and Banking Studies and Consulting.
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