INTRODUCTION OF EURO CURRENCY (Impact on Singapore economy)

Mrs Lim Hwee Hua asked the Minister for Trade and Industry whether the introduction of a single Euro currency and the eventual formation of a single market in Europe will have any implications for, and impact, direct or indirect, on investments, trade flows and inflation for the Singapore economy.

The Minister for Trade and Industry (Mr Lee Yock Suan): Mr Speaker, Sir, the European Union is a significant trade and investment partner for Singapore. As a bloc, it was our third largest export market last year, accounting for 14% of our exports. It was the second largest investor into Singapore (accounting for about 20 % of our total inward investment) and our third largest investment destination abroad (accounting for about 12 % of total investment abroad). . The introduction of the Euro with the target of monetary union by 2002 is a fundamental shift. There are still considerable uncertainties surrounding the final shape of the European Monetary Union (EMU) and its effects on EU growth and trade patterns. Our current assessment of the impact on Singapore is therefore tentative.

The creation of a single currency per se should not affect the volume, direction and composition of trade and investment flows significantly. While a single currency eliminates cross-border transaction costs and could lead to increase in intra-EU(15) trade at the expense of trade with the rest of the world, there is no historical evidence that this will necessarily be the outcome. For example, the Single European Market was formed in 1993 and yet, over the period 1990-96, the trade growth between EU (15) and Asia at 9.1 % per annum was faster than the intra-EU (15) trade growth of 3.6 % per annum.

From a longer-term perspective, it is widely expected that Europe would benefit from higher efficiency and market orientation as a result of the EMU. A stronger EU is likely to increase imports from Asia and the rest of the world. To qualify for entry into the EMU, according to the criteria of the Maastricht Treaty of 1991, member countries had to keep their inflation rates low, at not more than 1.5 percentage points above the average inflation rate of the three countries with the lowest inflation rates. Monetary policy under the EMU is expected to maintain this price stability and help keep price increases at bay. Given the high import content of our economy, this development should have a small positive effect on imported inflation for Singapore.

Dr Lee Tsao Yuan: Sir, what is the Minister's assessment of the potential use of the Euro as a reserve currency?

Mr Lee Yock Suan: Sir, I think this question is better answered by MAS or the Finance Ministry. My own expectation is that it will be significant.