SUNS 4351 Tuesday 12 January 1999

Brussels, Jan 8 (IPS/Niccolo Sarno) -- The European Union (EU)'s executive Commission did no studies on the possible effects of its Economic and Monetary Union (EMU) on developing nations' economies - barring the few whose currency is now pegged to the new European currency, the euro.

But many poor countries are expected to be affected by the recent introduction of the euro, at least where their currency reserves, trade, aid, and exchange rates are concerned.

"The biggest problem for poor countries, especially the countries in Africa's CFA zone, would be crazy (euro/U.S. dollar) fluctuations in either way," warns Sascha Pichler of the Brussels-based European Network on Debt and Development, EURODAD.

"If there are large fluctuations between the euro and the dollar, either if the euro becomes weak or if it becomes strong, there can be problems," Pichler told IPS.

In the CFA franc zone, where the common currency of 14 West African nations was pegged to the French franc until the introduction of the euro, countries may find themselves in trouble if the euro becomes stronger: it would erode the competitiveness of their exports to
Europe, which accounts for 60 percent of their trade.

The EU has guaranteed CFA franc-zone nations that the switch to the euro will not prompt any change in the fixed parity between their CFA franc and the French currency. There is agreement that there should be a mathematical conversion of the current 100 for one CFA-French franc
parity into euros.
But trade pegged to the euro could soon be much cheaper for both African exporters and European importers, because exchange costs will be reduced, making African imports into European markets much cheaper.

The euro is expected to replace the dollar not only for much of the trade within the euro-zone countries, but also between them and other major trading partners, such as Britain, South Africa and Brazil.

While the effects of the euro outside the EU are expected to be first felt in areas adjacent or linked to Europe - mainly the Mediterranean, Eastern Europe, and the CFA franc zone- other regions, such as the Caribbean, may very quickly be affected.

During a seminar organised in Barbados last year by the Caribbean Association of Industry and Commerce, participants were already warning that "depending on the dollar/euro exchange, the value of EU aid and concessional loans to the region may be enhanced."

According to David Jessop, executive director of the Caribbean Council for Europe, this is because, "on disbursement or repayment, such sums have to be translated into or out of regional currencies tied to the US dollar."

The impact of the euro on poor nations with export-driven economies may increase in the longer term, as some commodity markets may find it more convenient to switch to the new currency.

"The significance of the euro for developing countries will increase if the euro replaces the dollar as the pricing and trading currency in major commodity markets," development economist Roelf Haan wrote recently in a paper for EURODAD. "Most writers on the subject see this as a probable development," he added.

On Monday 4 January, 11 of the 15 EU members started using the euro in addition to their local currencies and the whole monetary environment of Europe's international trade, financial exchange and stock markets began operating in their common currency.

The 11 countries - Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain - account for nearly 31 percent of world exports. They conduct more trade with the rest of the world and have larger foreign exchange reserves than the
United States.
The three EU countries who opted out of the euro - Britain, Sweden and Denmark - are now under pressure from local business to reconsider their decision, in view of the astounding success of the new currency in financial markets.

A fourth country - Greece- did not qualify to join the club.

Euro's success has also prompted Japan to give new strength to the yen, so as not to lose ground.

During a three-year introductory period, the prices of goods and services sold by the EU to non-EU nations will be quoted both in euro and in the local currency, but banknotes and coins will circulate only from the year 2002, replacing national currencies.

Most countries, both within and outside the euro zone, are now expected to gradually start increasing the share of euros in their national reserves, although the changes are expected to come slowly.

According to many analysts, the position of the dollar as the world's only pivotal currency may gradually come to an end, as a direct consequence of the introduction of the euro.

The world is widely expected to move towards a tripolar system of international currencies dominated by the dollar, the euro and the yen, although some forecast a multipolar currency world.

But financial experts say it is difficult to predict whether the dollar and the euro will maintain a stable relationship or fluctuate. The exchange rate of the dollar may well be affected as the need for dollar
reserves as part of the world's total reserves will diminish.

Some U.S. economists reportedly expect central banks throughout the world to pour up to two trillion dollars into the euro - triggering a drop in the U.S. dollar's value of up to 30 percent over the next six months - in a bid to broaden their base for exchange-rate management.

Currently, the dollar accounts for 57 percent of the reserves held by central banks and it is used in more than fifty percent of international trade and borrowing.