The EURO and the Euro-Mediterranean Partners

The EURO was introduced on 1 January 1999 with the aim of integrating the financial markets of the Member States of the European Union. The EURO also has the ambition to become a major actor on a global scale, alongside the US Dollar and the Japanese Yen.

As far as the Mediterranean partners of the European Union are concerned, there is little doubt that the EURO will have a significant impact on their foreign trade although at the present moment these countries have different levels of co-operation with the EU. Some have concluded Partnership Agreements which have come into force: the Palestinian Authority in July 1997, Tunisia in March 1998, Morocco in March 2000 and Israel in June 2000. Other countries like Jordan, Algeria, Egypt, Lebanon and Syria are still in the negotiation or ratification process.

To assess the impact on the Mediterranean economies, we should first take into account that based on various simulations, the EURO and the convergence of the EU economies would first lead to growth in the Euro Zone. The IMF projections suggest that the EURO Members growth rate deviation of GDP from the baseline scenario would be : 0.2% in 2000, 1% in 2002 and 2.9% in 2010.

Due to the economic integration, business cycles within the EU started to be more synchronized, consequenty economic fluctuations in this area will increasingly affect the Mediterranean Partners via trade relations, exchange rate fluctuations and the integration of financial systems.

The overall effect on one single partner is not so easy to quantify. It depends on the degree of integration of this specific economy to the EU via foreign trade, exchange rate regime adopted and on the trade elasticity of this country’s economy to overall economic growth.

Some empirical evidence shows that all international trade that is not invoiced in either the importer or the exporter currency is invoiced in US Dollars (Gasman Law).

In 1995, the share of the world exports expressed in US Dollars was 52% whereas the share of DEM was 13.2%. Due to the low convertibility of the developing countries’ currency, trade between the developing countries and industrialized countries is invoiced in the currency of the latter countries of in US Dollars.

Some economists have estimated that about 20% of world exports would be expressed in EUROs after the currency’s introduction. In addition, network externalities will possibly lead to a big increase in the use of the EURO in trade invoicing.

Investors should also expect portfolio shifts towards the EURO in the final settlements of their portfolio holdings as the Euro Zone Countries would probably have a common Economic Policy that would lead to major growth and stability and therefore to a higher return on investments and more accessible credit conditions as the Security Markets become more transparent with lower transaction costs.

As third countries have their foreign debt expressed in US Dollars and their external trade partly in European Currencies probably their decision makers would try to correct this deviation by converting part of the debt in EUROs and maybe pegging their currency to the Euro Zone in order to achieve higher stability.

Central Banks of third countries will also be tempted to hold foreign reserves in EUROs as trade volumes in this currency would increase and because foreign debt would be expressed in EUROs.

Based on the above, we can draw some conclusions concerning the effects of the EURO on the Mediterranean partners.

Due to the growth in the EURO Zone, the Mediterranean Partners would probably benefit in the long run of because of higher exports, bigger comparative advantage, major lending/financing possibilities within the EU and maybe they would foresee possible decisions of implementing new economic policies along the same lines as the ones adopted by the EU.

The EU is the major trading partner of the Mediterranean region holding 50% of their trading flows.

The introduction of the EURO, in spite of the economic, social and demographic differences between the EU and its partners would make the market more transparent and competitive, reduce the exchange rate and conversion risks for third countries which would also benefit from the economic growth in the EU.

The EURO would also change the currency used for invoicing :

Imports from the other side of the Mediterranean represent almost 40% of EU imports but only 18% of the invoicing is made in European currencies. With the EURO this figure would certainly grow by 1/3 according to recent estimates. The EURO would not modify in the short term the contractual long term obligations in US $/Yen but it would change only gradually the commercial and banking « consuetudo » practices. The foreign debt of the Mediterranean countries is mainly expressed in US Dollars and in Japanese Yen in spite of actual commercial flows with the EU.

The EURO will have some effect on the foreign currencies reserves of third countries’central banks as reserves are correlated with foreign trade in flows and out flows.

The exchange rate regime of some Mediterranean countries is pegged on the US Dollar or to baskets of currencies. With the EURO and the Euro-Mediterranean Partnership, these nations will have to adopt more flexible exchange rates in order to liberalize their capital markets (as laid down in the Partnership Agreement). As soon as the EURO would be in its final implementation phase, these countries will have to determine the flexibility level of their currencies and might probably peg them to the EURO and try to adopt economic policies which would allow them to be integrated within the EURO Zone and the International Markets.