The Euro: a viable alternative to the U.S. dollar

The European Commission and Bank Negara Malaysia sponsored the Euro Conference in Kuala Lumpur last week. One of the noted speakers was Klaus Regling, director general for economic and financial affairs at the European Commission. He gave his keynote address on the role of the euro on the global economic landscape. Riyadi Suparno of The Jakarta Post interviewed Regling, who used to live in Jakarta for two years as a representative of the International Monetary Fund, to get more of his thoughts on the euro and the possibility for the Association of Southeast Asian Nations (ASEAN) to learn from the European Union.

Question: You talked about the role of the euro in the global economic landscape. How has the euro actually changed the landscape?

After six years (since its introduction), it's very clear the euro has brought significant benefits to the euro area, that there is more macroeconomic stability, that there is no more intra-euro area exchange rate crisis. In the past, whenever an international crisis happened we had tension in Europe, and that's very expensive in terms of lost growth and lost investment.

Transparency has improved because everything is in the same currency, in one price. So, it's easier to compare prices. Competition has increased, and economists know that increased competition leads to more growth, to more prosperity. So, all of these are positive for us internally.

I know from a conference attended by private investors that the euro is increasingly used in Asian countries. As bankers explained, this is positive for the borrowers and investors in Asia. And that's important, that the euro is bringing benefits to the people outside the euro area.

So, the benefits are there very clearly, and at the same time, we know that we have to increase our efforts to have higher growth rates in Europe. We have a response agenda that describes all the structural reforms that we have to do in order to raise potential growth through a productive labor market, and reform to bring down unemployment and to raise growth. This is a process that will take several years, but we have started this.

The euro has undoubtedly become the second most important international currency after the U.S. dollar. And there is some talk in this region, including in Indonesia and Malaysia, to shift some of the central banks' reserves from the U.S. dollar to the euro. What do you think about this issue?

It is true that the euro is the second most important currency in the world. Of course, there is quite a distance between the dollar and the euro, but the distance is getting smaller.

I think it's good for international monetary system not to rely on one currency but to have another currency, that is not quite as important yet but getting closer. That's good for everybody.

But, it's up to different countries in the world to decide on how they make use on this situation, that the euro has become an alternative to the dollar. So, countries can use it, but it's up to every country, Indonesia, Malaysia, and others, to decide in what form and to what extent they want to use the euro. And, I will not give advice on that.

Some have expressed concerns that if big countries in Asia like China shift their reserves away from the dollar to the euro, it could create international instability. What's your opinion about such concerns?

Again, it's up to China to decide what to do. We know that China, like many other countries in Asia, has already increased the share of the euro in their foreign exchange reserves. So, this is an ongoing process, and it has not lead to any instability. But, the speed and the extent to which it happens must be decided by the country concerned.

Supporters of integration believe that ASEAN should follow the path of the European Union in its moves toward better economic integration. In what way do you think ASEAN can learn from the experience of the EU?

ASEAN is different from EU. So, I don't think it's possible to copy the European experience because European countries are economically speaking fairly homogeneous, therefore, it was easier to create a monetary union. Also, one must always remember that monetary union and the euro is the end of a 50-year history of an ever-closer integration.

But maybe, that's a lesson for ASEAN that it is a long process and takes time. One cannot do it the other way around. One cannot start with a common currency and do the integration later. There had been a lot of integration in trade and capital flow relations, and it must happen before a common currency is possible.

So, it takes time but also takes a certain sequence of integration steps. And ASEAN is doing that. ASEAN is beginning to have a very close cooperation among the central banks. There is a swap agreement thing that in Europe happened in the 60s, for instance. There is increasingly capital market liberalization. Central bankers and finance ministers talk to each other more often now than in the past. All these are important for more integration. In that sense, maybe Europe can be an example, but our countries are different otherwise.

You talk about the sequencing of the integration process. Can you elaborate further on what comes first and what comes next?

Often, one starts with trade integration, trade liberalization and that what happened in Europe in the 50s and 60s. That's happening now in ASEAN. Then, the next step would be the integration of the financial markets, the capital markets, by abolishing capital controls. This in Europe took 30 years and the last removal of capital controls only happened in the early 90s.

It has started in ASEAN, and it will take some time and it means many things. It means the banking system has to be strong enough; the banking supervision has to be adequate in the different member countries. They have to be harmonized to some extent. All these are preconditions if one wants to do the final step, a common currency.

Looking into the current situation in ASEAN, do you think it's possible for ASEAN to eventually adopt a common currency?

I would not exclude this, but this is certainly something that would take decades to get there.