Euro getting more prominence, but still way behind dollar

Riyadi Suparno, The Jakarta Post/Kuala Lumpur

The euro is getting more prominence internationally, and yet, businessmen, bureaucrats and experts gathering for a euro conference here share a common view that it would take some time before the new currency actually reaches the same level of importance as the U.S. dollar, which has been the single most important international currency for years.

Figures presented by the European Commission indicate that the euro is now the second most important currency in the world, after the dollar, but above the Japanese yen.

And yet, the gap between the dollar and the euro in terms of international use is still wide. "But at least, the distance is getting smaller," Klaus Regling, director general for economic and financial affairs of the European Commission, told The Jakarta Post here on the sidelines of the euro conference on Thursday evening.

Since its launch in 1999, the use of the euro by the international community has continued to increase. Indeed, the euro has played an important role in the international bond market, foreign exchange markets, as a currency for settlement and invoicing and as an anchor or reference currency.

In the Southeast Asia, although the dollar remains the currency of choice, the euro has been used in a number of transactions as well as in bond issuance. Singapore, Malaysia and the Philippines, for instance, have issued euro-denominated bonds.

Romeo L. Bernardo, managing director of Lazaro Bernardo Tiu & Associates, Inc., noted that the issuance of euro-denominated bonds in the Philippines had attracted significant demand especially from European institutional investors. The Philippines' experience with euro-denominated bond issuances are positive in terms of diversifying funding sources," Bernardo said.

Miranda Goeltom, deputy governor of Bank Indonesia, shared the view that the increasing prominence of euro has made it attractive for companies with more exposure with the euro to increase euro reserves.

Also, like any central bank in Asia, Bank Indonesia is also diversifying its foreign exchange reserves into euro, depending on the country's exposure to the euro-denominated obligations. Miranda said on Friday.

Nevertheless, she warned that like any other currency, the euro has its own risks. What is actually behind the success of the euro to become a major international currency? European Commission has attributed the euro's increasing international prominence to the European Central Bank's success in carrying out its duty in maintaining price stability.

The ECB has managed to bring down inflation in the 12 countries under the so-called euro-zone into the target of 2 percent per annum - the lowest level in the past century.

"Judging from the experience to date, the euro currency has been an unquestionable success - euro area price stability being the best exponent," Jose Manuel Gonzalez-Paramo, member of the executive board of the European Central Bank, told the conference, which was organized by the European Commission and Bank Negara Malaysia.

The euro area covers 12 of 25 EU member countries that have adopted the euro as their common currency, including EU's heavyweights of Germany, France and Italy. Also, the creation of the euro had increased trade and investment in the intra-euro area as well as between the euro area and other countries, and it also enhanced financial market integration although it is still far from perfect as compared to the U.S. financial market, which is deep, liquid and unified.

However, low inflation and better integration of financial markets do not always lead to economic growth, as it is proved in the euro area. Growth has remained sluggish and this has raised concerns among investors, who are currently holding the euro.

Gonzalez-Paramo noted that the lackluster growth highlighted the importance for Europe to implement structural reforms. Otherwise, it would eventually affect the performance of the euro in the international market.

Responding to the concerns, Regling noted that the European Commission had championed structural reforms in countries in the euro-zone under the agreed Stability and Growth Pact, which includes reforms in the labor market to bring down unemployment as well as reforms in pension and health care systems.

"I think the more successful we are in the Europe in solving our problems, like raising growth, the more important the euro will become," Regling said.

========== sidebar ========== Euro's importance to Indonesia

Miranda Goeltom, senior deputy governor of Bank Indonesia, on the importance of the euro to Indonesia: The increasing presence of euro in the world has brought an added ingredient to our already complicated situation. First of all, of course, there are opportunities, as euro countries become more integrated.

With a single currency, it is easier for Indonesian traders to deal and trade with them. They do not have to bear the cost of the transaction of having to convert the currency, from one into another, and to standardize the price, whereas in the past, because of a weaker currency in France, for example, it was cheaper to buy products directly from France with the French franc as it was more expensive to buy German products in German marks, etc. Now, it is becoming the same across the board.

Then for Indonesia, the advantage of having this euro is the convenience and the lower cost of doing a given transaction. On the other hand, when we start talking about the presence of the euro, the increasing use of the euro diversifies the risks.

Of course, the central bank is looking into holding some euros in reserve. For example, if the liability of the euro denomination is higher, then of course, it would be quite natural to believe that increasing our euro holdings within the central bank should be perceived as a responsible move.

Secondly, you get the fact that the euro has also the volatility, for example, going from the period of weakening after its introduction in 1999, and then the period of strengthening, and a short period of weakening significantly again.

Equally important to see, the euro-denominated bonds, and other financial products denominated in euro are becoming more and more available on the market. Thus, companies that have more exposure in euro will naturally prefer to issue euro bonds. (JP/Riyadi Suparno)