Doing Eurobusiness

It's finally here. On the afternoon of December 31, finance ministers of 11 member countries of the European Union (EU) signed an agreement freezing the exchange rates of their respective currencies to the Euro and thus heralding the biggest single event ever on the global money markets. And there was euphoria in the European stock markets. Anticipating huge benefits of a single currency for the 11 participating economies, the European bourses shot up by an average of 5 per cent on January 4, the first trading day of the new year. Elsewhere too, the creation of a truly unified economy with the world's largest trading surplus was greeted with enthusiasm as most companies see huge opportunities in the unified market.

Indian companies have also been watching the developments in the Eurozone (as the 11 countries are now referred to) with great interest. In fact, the first deal in Euro was arranged by the Standard Chartered branch in Mumbai, the only money market in the world trading on January 1. Indian firms by and large are enthusiastic about the Euro, which has several obvious benefits. For one, a relatively strong Euro will impart a higher purchasing power to previously weak currencies, making Indian goods cheaper.

The Eurozone countries account for nearly a third of India's total exports and so far Indian exporters had to deal in 11 different currencies, making hedging against fluctuations a complicated task. With the introduction of the Euro, the risk of volatility in the currency markets will be reduced tremendously on two counts, says a senior official of the State Bank of India (sbi) in Paris. First, the Euro is expected to be a stable currency unlike some of the previous 11 like the Italian Lira or the Irish Pound. Second, the task of arranging cover for one currency is definitely easier and simpler than doing it for 11 currencies.''

It will also make the movement of goods within Euroland far easier. This will cut distribution costs as goods can be supplied from one point of entry. A banker points to an added benefit: Earlier, if an exporter had contracted to supply some goods to, let's say France, and due to some reason the contract was broken after the goods had arrived. It was then nearly impossible to move it to a buyer in another European country, due to the currency risks involved. But with a single currency, that problem is taken care of and it will facilitate the intra-European movement of goods. That will prove a huge plus point for the Indian exporters.''

Vijay Phadke, a Paris-based corporate lawyer advising European investors in India, feels the biggest advantage would be access to a unified market of 290 million affluent customers. Nina Mitz, spokesperson of the French ministry of economics and finance, agrees. What companies in Asia and India should look for in this unprecedented development is a huge opportunity. They should look at the Eurozone as a potential investment area with a tremendous potential from well-to-do consumers.''

But that also means a whole lot of transitional training. Most Indian exporters have so far been used to making quotes in dollars or a handful of select other currencies. Now, for a large chunk of their exports, they will have to switch to quotations in the Euro. And with the associated changes like interest rates, value-added tax and direct taxation levels, Indian companies will need to retrain their staff to understand these changes better to benefit.

Importers too stand to gain. Euro-based imports will be costlier to begin with. But with a uniform currency, importers can compare quotes from across the continent. And increased competition will push prices lower. But Phadke advises caution: Even most European companies still do not understand the Euro and its implications. In such a scenario, a number of Indian businessmen could also stand to lose by not being able to understand the process of conversion from the individual currency to the Euro. They need to understand issues like costs of bank guarantees and the differential interest and tax rates that still prevail in the Eurozone. They could face increased processing charges due to the Euro and even prices that their suppliers charge could move up as a Fortress Europe takes shape.''

That's the biggest threat to non-EU firms. By their own admission, Euroland countries will first focus on setting their own house in order. At this moment, trade is not our priority area. The top priority of the Eurozone countries right now is to promote growth in the economy and tackle unemployment which has reached unacceptable levels in the last few years. So, trade is not the focus for us right now,'' says Mitz.

K.N. Dey, senior vice-president at Mecklai Financial and Commercial Services, doesn't see any serious impact on trade in the foreseeable future. But I do believe that corporates will have to track the Euro on an hourly basis, he says. Unhedged liabilities are best redeemed before the Euro strengthens further. A number of external commercial borrowings will now be expedited through the Euro route.

But exporters need to be cautious. In a borderless, single-currency market, exports of non-traditional Indian products will face greater competition as manufacturers both within the EU and outside will scramble for greater marketshares. If Indian products are to garner a larger share, they will have to be competitive in terms of quality and price.

The EU has also shown itself to be protectionist when its industry is hit. Apart from anti-dumping duties, the EU has in the past erected non-tariff barriers as well. But Eurozone protagonists don't see the need for alarm. There is no concept of protecting trade. We just want to focus on enhancing consumer demand within the Eurozone and through this growth tackle the problem of unemployment. Euroland will be the engine of growth in world trade, rather than a handicap or a hurdle to it,'' says Mitz. Agrees Herve de Vaulx, vice-president of Banque National de Paris: Euroland is very open to the global market and there are no specific trade barriers. And Euroland will be attractive to the rest of the world due to the stability of its macro-economic fundamentals.''

There is another advantage for a capital-starved country like India. So far, corporates have been raising capital largely from the New York and London bond markets. European markets have never really been either big enough or have lacked the liquidity to match them. But with the unification of the 11 economies and their capital markets, a new bond market has been born. The European Central Bank, which will run the monetary policy for Euroland, is already committed to creating a strong alternative to the dollar and yen as a globally accepted international currency. And a highly liquid and deep bond market is essential for that.

With the formation of a Eurobond market, Indian companies can hope to raise money from this source as well. Yes, the Eurobond market will be highly liquid and it will benefit countries to shift some of their foreign currency assets to the Euro as it's a very good opportunity,'' says de Vaulx. sbi officials agree, but feel interest rates will be crucial. If the European Central Bank is able to keep the rates down to the 3 per cent level that they are committed to, then of course it would be a good opportunity for the Indian companies to raise cheap capital from the Eurozone. But yes, there is definitely an added option now for Indian corporates,'' says an official of the bank.

On the first day of trading in the Euro, the world's newest currency opened at 1.18 to the dollar, slightly higher than the 1.17 that had been predicted by money markets the world over. The European Central Bank says it will keep a close tab on the movement of the currency and will not hesitate to intervene if it rises sharply. It is a very thin line, leaving the central bank little room for manoeuvre. If the Euro gets too strong, European exports get uncompetitive. But neither is a weak Euro good for investor confidence,'' says de Vaulx.

With India traditionally enjoying a negative trade balance with the EU, a weak Euro could boost exports, but would also make imports from the continent more expensive. Clearly, the stability of the Euro is far more important than its relative strength or weakness.