MUMBAI, May 9: The emergence of European Union's common currency `Euro' could well challenge the US greenbacks' dominance in world markets. This was stated by Federal Association of German Banks committee for economic and monetary policy chairman Hermann Remsperger.

Speaking on `The European Currency Union and its impact on the European and global economy', Remsperger, also an investment committee member of BHF-Bank, noted that there were two important questions pertaining to post-Euro birth scenario: The possibility of the Euro emerging as a strong contender to US greenbacks and the Euro's volatility and resultant impact on the global monetary system. Remsperger who advises Bundesbank `whether to sniff or sneeze', is described by many as as the `dean of Bundesbank watchers'.

``To me, the Euro can challenge the dollar if two conditions are fulfilled. First, the Euro must be supported by the economic potential of the European Monetary Union (EMU) countries, and second the EMU countries on aggregate have to show good economic results,'' observed Remsperger.

It was pointed out that inflation in the European countries were lower than in the US, and that the European Monetary Union would have a current account surplus whereas the reverse would be true of the US. Based on a huge monetary union, the surplus in the European current account would be $75 billion in 1996 while the deficit in the US would be $165 billion.

Further, the share of European Union in global exports is currently either 40 per cent or 20 per cent.

This variation is on account of discounting trade between European countries as world trade. In the 40 per cent perspective, European Union exports would have amounted to $2,000 billion while it would be $750 billion in the latter case.

"From the common currency point, only trade outside the European Union is relevant. When compared to US exports of $580 billion, European exports of $750 billion (arrived at after discounting for intra-European trade) may look big, but it is not predominant,'' Remsperger said. He made the critical observation that foreign trade share is not equivalent to the invoicing made in trade.

The Bundesbank's calculations reveal that 45-50 per cent of international trade are invoiced in dollars even though the share of the US in global exports was less than 12 per cent in 1995. "This huge gap between trade and currency share shows that exporters have their currency preferences," said Remsperger.

Speculation on the Euro potential strength threw up interesting ideas. While noting that exporters might opt for a stronger currency if the new currency is weak, it was also pointed out that "international trade will be smaller and for that reason, European policy makers will give lesser attention to exchange rates resulting in more instability. Monetary union might make currencies more volatile".

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.