A Union In A Shambles
Business Today (India) - 17 July 2005
European Union's new President, Tony Blair, has a simple Job One: Put the EU back on rails.
by Ashish Gupta
The second week of June hasn't been too kind to the 25-member European Union (EU). Even before it could fully recover from the double whammy of a "no" from two of its founding members-France and the Netherlands-on the ratification of its new Constitution, differences over farm subsidies between France and Britain have seen its next Budget (2007-2013), come unstuck. The "no" from France and the Netherlands has come for purely domestic reasons. Brussels' directive that the concept of "a single European market" should include doctors, lawyers, accountants, plumbers and other professionals has not gone down too well with the French and Dutch. They fear that they would be undercut by an influx from the low-cost neighbours such as Poland. Says Charles Tannock, Member, British Conservative Party and European Parliament: "The new Constitution is as good as dead."
All the wranglings have taken their toll on EU's common currency, the euro, which has been on a decline since the beginning of this year. By the week ended June 18, the euro had dropped 1.2 per cent against the dollar. However, many are calling this dip a mere "correction". Says A.V. Rajwade, forex and treasury management consultant: "Too much is being read into the decline of the euro. A fall of 10 per cent compared to a rise of around 40 per cent in the last three years vis-à-vis the dollar is just a correction."
But what does a fractured EU and a weak euro mean for the Indian economy? A squabbling EU is definitely not good news for India's exporters, but it is unlikely to impact Indian trade. The reason: neither has the composition of the eu changed nor has its tariff levels. But the bigger issue is whether in the short run the euro will continue as an alternative to the dollar in the currency reserves of central bank. According to a recent study by the Bank of International Settlements (BIS), the biggest seller of dollars in the last three years has been India, which has reduced its dollar assets from 68 per cent of the total reserves to just 43 per cent in 2004. "That (the decline) will certainly discourage fresh investments in the euro," says Nagesh Kumar, Director-General, Research and Information for Developing Countries. That means India has little choice but to stay invested in the US dollar. -Ashish Gupta