The European Monetary Union (EMU) will create a single European financial market and provide a potent investment environment which will benefit investors and borrowers, a top European banker said yesterday.
"The world will have an alternative reserve currency (the euro) to the dollar," said Nobert Walter, chief economist of the Germany-based Deutsche Bank Group.
Walter further said the elimination of currency risk and related transaction costs will help the development of a new investment climate and equity culture within the Eurozone. "This will create new opportunities for Asian investors and corporations," he said.
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Walter was in Mumbai yesterday and met the Reserve Bank of India (RBI) officials and leading Indian corporates. The European bond market presently is about 60 per cent of the US bond market, and its size could go up to 85 per cent if the UK joins the union later, making it attractive to borrowers who currently prefer the US or the UK markets on account of their size. Accessing individual
European countries was not feasible as individual markets did not have the size or the depth, Walter said. However, he warned that borrowers, particularly from emerging markets, should be careful about borrowing a currency which appreciates against their own as the high hedging costs could eliminate any interest rate benefit. Walter said, the European equity market should also develop if the UK joined the union in a few years. From the point of view of direct investments, Walter said the EMU would provide corporations going global with a market of at least 270 million consumers, a figure which could swell to over 370 million on the UK joining, leading it to surpass the US market.
He said while national policy on direct investments would remain, there would be common accounting practices and removal of trade restrictions would make expansion in the region easy. Besides the use of a single currency across the region would remove the risks involved with the exchange rate and related transactions costs.
The European Central Bank will keep the euro stable as it has the resources to do so. The eleven European nations have total reserves amounting to around $375 billion against the US reserves of just $75 billion.
Walter said Deutsche Bank had met with several central banks in Asia over the last year. He said he expected a substantial portion of these countries' reserves to be converted to euro.