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Europe must offer trade credits and financing to Asia, says euro expert

This month's debut of the euro may yet provide east Asia's developing economies an avenue to faster recovery.

But this potential, latent in often underestimated economic ties between Europe and Asia, depends on the euro's stability in the coming years and how Asian countries take advantage of European integration to draw in capital and increase trade ties.

''There is an opportunity here because countries in the region need so much capital and investment and there is (also) a window of opporunity for the European economies to come in,'' Reza Siregar, an economist with the Manila-based Asian Development Bank said in an interview.

At this point, recession-hit economies do not have the resources to rebuild on their own shaky banking systems or do debt restructuring.

Thus, Siregar says, Asia would benefit from improvements in three areas of involvement with Europe: greater investment by European countries, Europe's focus not only on trading mostly among themselves but with Asian countries, and the provision of badly needed trade financing.

Some 14 per cent of foreign direct investment by the European Union goes to developing Asian countries at present. The volume of Asia's trade with EU economies already surpasses that with the United States.

Because Asian economies are hard pressed to raise capital overseas for recovery, Siregar says trade financing by Europe could be crucial for these struggling economies.

''These countries need capital to help their exports, and the EU's big manufacturers have in-house credit financing. So if these can be channeled to Asian countries, it will be something,'' said Siregar, who has done a study on the euro's impact on Asia.

''This is the opportunity because this is the time countries need trade credits and financing,'' he added.

Whether Asia and Europe will indeed move to maximise potential for deeper integration, fostered by a common currency, remains to be seen. Much of European trade still takes place within the continent.

Also, fearing cheap imports from troubled Asian economies and Russia, Europe last year imposed new limits on imports of certain products from China, Hong Kong and Singapore, among others.

This may be the less-than-ideal reality, but Siregar says the point is that analysis of economic ties shows there is ''evidence'' for arguing deeper ties between Asia and Europe.

The euro's emergence also marks the creation of Europe as the world's second largest stock market after the US, offering Asia another capital market to tap for funds.

Crisis-stricken countries would also benefit from the coming of a stable currency that would allow them to vary the currencies in their foreign reserves basket -- something many central banks have been wanting to do since Asia's currency crisis.

''The crisis has shown how dangerous it is to put all in your basket in one currency,'' Siregar said. More than half of the foreign reserve holdings of Asian developing countries are in US dollars.

Countries from Japan to Thailand have expressed interest in translating some of their dollar reserve holdings into euros.

Siregar says the ample room for greater Asian reliance on the euro is not always readily evident since the bulk of transactions are done in dollars.

For instance, in many Asian economies, 70 to 90 per cent of trade transactions are done in the dollar, even if Asia's trade with EU countries exceeds that with the United States.

If the euro becomes a stable currency by 2002 (when local European currencies cease to be legal tender) and European companies ask their trading partners to pay in euros, there should be a shift (in currencies),'' Siregar noted. ''And this may be a major one, assuming that the euro proceeds smoothly.''

Likewise, Siregar says it is not always readily known that while the bulk of long-term debt of Asian developing countries is in dollars and yen, most of that debt is owed to European institutions and banks.

Siregar's study shows that as of the end of 1996, about 35 per cent of the long-term debt of Indonesia, Malaysia, Thailand and the Philippines were in yen and 24 per cent in the dollar. Only eleven per cent were in European currencies like the German mark, French franc, British pound and Swiss francs.

UNI

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