Brazil and the Euro - Part 3

Brazil and the Euro - Part III - Published in November 2000.

“How can currency stability be achieved for the Brazilian economy?”

Today, the Brazilian government is missing a great opportunity to adopt the euro as the new Brazilian currency. After Brazil adopts the euro, Brazil will have eliminated the currency risk between Brazil and the European countries of the European Union. Afterwards, the market place would make the necessary adjustments to the prices of assets in Brazil to reflect the fair market value of these assets in terms of the new euro currency.

By: Ricardo C. Amaral

The original article was published in "The Brasilians", in July 1999, and a follow up article was published in November 1999. Since November of 1999 we had some new developments regarding the new currency —the euro —as follows:

What happened to the value of the euro in relation to the US dollar?

The euro was born January 1, 1999 at an exchange rate of US $ 1.17 to $ 1 euro. The expectation of the creation of the new currency in Europe in the fall of 1998, helped the euro currencies to increase in value in the last six months of 1998. When the euro was born on January 1, 1999, that currency was overvalued by an estimated 9 to 10 percent in relation to the US dollar.

Since its inception in January 1, 1999 at US$ 1.17 the euro steadily declined in value against the US dollar and was quoted at around US$ 0.88 in New York trading on September 28, 2000. The explanation for this 25% decline in value of the euro can be explained as follows.

The first 10 % decline of the euro came about as the euro adjusted itself in relation to the US dollar to reflect the current economic realities behind the two currencies. The euro gave back the 10 % speculative increase that had occurred in the fall of 1998.

The other 15 % decline in the value of the euro can be explained in this quote from an article in Business Week (Oct. 2, 2000 Pg 144); EUROPE CASH IS FLOODING INTO THE U.S. "the financial tidal wave that has washed across the Atlantic is merely investment -- especially direct investment in the booming U.S. economy. European companies have been buying up U.S. outfits large and small -- from Unilever Group's purchase of Ben & Jerry's Homemade ice cream to megadeals like Deutsche Telekom's proposed $50.7 billion takeover of wireless communication company VoiceStream Wireless Corp. European companies made more than $ 170 billion worth of acquisitions in the U.S. in the first half of this year. As European companies have converted euros into dollars to close their purchases, the euro has hit low after low."

The Business Week article also mentioned that from the beginning of 1998 through the second quarter of 2000 the U.S. attracted more than $ 332 billion in foreign direct investment (FDI) from the euro countries (estimates from Morgan Stanley). Morgan Stanley also estimates $162 billion of foreign cash or stock purchases of U.S. companies were pending as of September 8, 2000.

Where is the bottom for the euro?

The euro can reach a bottom as low as 80 ¢ to 75¢ range in the short term. The decline in value of the euro started to have an impact on the earnings of American companies operating in Europe. These lower earnings will affect the price of these stocks in the American stock market. When the American stock market declines and returns to more realistic level, the Europeans will start repatriating their money, and the result will be the increasing value of the euro against the U.S. dollar. Before the end of 2001 the euro can be trading at 1 to 1 ratio in relation to the U.S. dollar.

Danish voters say "No" to euro. Does it really matter?

Let's put things in the right perspective before we get carried away by the Danish rejection of the euro. The euro countries have an estimated population of 350 million people. The European Central Bank (ECB) holds the equivalent of $ 39.6 billion in foreign currency reserves; its 11 member central banks hold an additional $ 222 billion, for a combined total of $ 262 billion in reserves. On the other hand we have Denmark, a country of 5.3 million people and $ 12 billion in foreign currency monetary reserves.

Why did the Danes inflict such an economic blow on themselves? What will happen when their currency comes under speculative attack in the future? Can Denmark prosper in the future, in the new global economy, without the protection afforded by the euro membership?

Greece and the euro.

On June 19, 2000 Greece was accepted by the European Union Council for membership in the new currency the euro. As of January 1, 2001 Greece will became a new member of the euro, bringing to 12 the number of countries that are participating members of that club.

Britain and Sweden.

The "no" vote in Denmark was a vote reflecting the Danish population's anxieties in relation to the future of Denmark's welfare state. In Sweden the population also is worried about the structural reforms that might be necessary when they adopt the euro. Britain eventually will adopt the euro; otherwise they will lose the remaining influence that they still have in European affairs.

A weak euro isn't a failed euro.

Business Week magazine published a article on September 18, 2000 (Pg.61) saying that all the gloom about the euro obscures the fact that the euro is already having a remarkably beneficial effect on Europe. It has stitched together 11 countries' financial systems, decreasing the cost of capital by creating a deeper, more liquid market.

...As a result, companies have issued stocks and bonds at record-breaking levels. Indeed, more euro-denominated than dollar-denominated bonds were issued last year: a staggering $ 600 billion, according to Capital Data Ltd. The money raised is funding acquisitions. As a result, the euro zone economy is being restructured and companies globalized.

The article also says that the euro puts pressure on governments, too. It makes it impossible for euro-zone countries to boost competitiveness by manipulating monetary policy. Instead, they must cut taxes, streamline social security systems, and make other reforms. They end the article by saying "Sure, the euro is weak. But a failure? No way."

Geographic location, and the assumption that the euro was created to be adopted only by European countries.

With today's technologies in computers, communications, satellites, air travel, etc, distance is not an issue to stop any country from adopting the euro as its new currency. I want to bring to your attention the fact that the euro is the official currency of a country in South America —French Guiana belongs to France and the official currency in French Guiana is the euro.

New currency for Mercosul.

On October 8, 2000, the president of the Bank Interamerican of Development (BID) Mr. Enrique Iglesias; he said that it is inevitable that Mercosul adopt a single currency because it is a common market, and the monetary union becomes very important.

I agree with Mr. Iglesias that Brazil needs to adopt a new currency such as the euro, but I don't think the countries of the Mercosul or of South America have the necessary international monetary reserves to create a new strong currency for South America. If they go ahead and create this new currency for South America the Merco or the Bankrupt, either name is fine, this new currency will be doomed from the start — no solid international monetary reserves to back up your currency—no cigar.

The next time the Real (the current Brazilian currency) comes under international speculative attack, the Brazilian international currency reserves (currently 39 billion US dollars) might decline to new dangerously low levels. In turn, exposing the Brazilian economy to exceptional high monetary risk could be avoided by Brazil adopting the euro as its new currency.

A chance of a lifetime.

Today, with the euro "no" vote from Denmark, and all the negative press that the euro has been receiving lately, there is an exceptional opportunity for Brazil to announce that it will adopt the euro immediately. That vote of confidence from the Brazilian government and the Brazilian people towards this new currency would open many doors in Europe, and would give a big boost to the euro in international currency markets.

BRAZIL — It is time to wake up!

Today, the Brazilian government is missing a great opportunity to adopt the euro as the new Brazilian currency. After Brazil adopts the euro, Brazil will have eliminated the currency risk between Brazil and the European countries of the European Union. Europe is a very important exporting market for Brazilian goods and services, and the elimination of the currency risk will help increase the volume of business between Europe and Brazil. Afterwards, the market place would make the necessary adjustments to the prices of assets in Brazil to reflect the fair market value of these assets in terms of the new euro currency.

After Brazil Adopts the euro —as its new currency, the rest of South America will follow its lead and also will adopt the euro. The euro would become the main currency in South America.

Part lll of this series- originally published by

“The Brasilians,” issue number 308, pg. 6E, November 2000.

Copyright © 2000 All rights reserved.

By: Ricardo C. Amaral.

Author and Economist

brazilamaral@yahoo.com

This article was reprinted on “Brazzil” magazine in June 2003.

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