Address by The Hon Tim Fischer MP, Deputy Prime Minister, Leader of the National Party, Minister for Trade, at the ABN-AMRO Euro Currency Presentation, Sydney, 30 April 1997

Introduction

I am delighted for the opportunity to speak at this Euro Currency presentation and I congratulate ABN-AMRO for taking the initiative to organise it.

As you know, the European Union (EU) has embarked on an ambitious program of economic and monetary union.

Australia's trading and investment community needs to be well informed about the nature of these important developments, even at this early stage in process.

The Importance of Europe in Australia's Foreign and Trade Policy Priorities

The European Union is one of Australia's key trading and investment partners.

While the Australian Government's highest foreign policy priority is closer engagement with the Asia Pacific region, I want to assure you that `Asia first' does not mean `Asia only'.

It means that this Government will also vigorously pursue Australia's vital political and economic interests in Europe.

More than that, our success in developing closer ties with our region has positioned Australia well to assist Europe in the development of its growing commercial links with the Asia Pacific.

Just two months ago, for example, at the Belgian Business and Industry Export Awards, Australia was awarded the top prize as an attractive "Distant Destination" growth market for Belgian exports and as a springboard into other important markets in the Asian region.

The Australia - EU Relationship

Let me remind you of just how important our trade and investment relationship with the EU is to Australia. A few facts will make this abundantly clear.

The EU is the largest source of investment in Australia, totalling $A112 billion in June 1995. This represents 28 per cent of foreign investment in Australia.

The EU is the premier destination for Australian investors, with accumulated investment totalling $A39 billion in June 1995. This means that more than 27 per cent of Australia's total foreign investment went to the European Union.

The EU is Australia's largest overseas market for services, and the EU is Australia's second largest merchandise export market. One of the major success stories has been wine which has increased sixfold over this period.

Australia has increased its share of European imports of elaborately transformed manufactures. The impressive performers include ships, office machine parts, telecommunications equipment and pharmaceuticals. The EU is also Australia's largest source of imports.

For the EU, Australia has become a base for hundreds of large EU companies which are tapping into the growing Australian market and enhancing their links to the Asia-Pacific region.

Our bilateral relationship with the EU is also important to us because of the EU's leadership of international trade issues in such key forums as the WTO, the OECD, and the Energy Charter conference.

Similarly, I know that the EU places great value on Australia's role as a key player - in the Asia Pacific through organisations such as APEC, and also in a range of other influential international groups and organisations.

The Road to European Integration

Given the EU's importance as a major trade and investment partner - and its influence in international affairs - Australia has taken a keen interest in recent European political and economic events and trends.

The dramatic developments in Eastern Europe, the European Single Market, the Maastricht Treaty on European Union, and now the prospect of Economic and Monetary Union, have changed - and are continuing to change - the face of Europe.

All these massive changes spell out the same bold message - Europe is coming together. It has been an ambitious program, and so far a successful one.

Sceptics had said that the single market wouldn't happen, but it did; that the Maastricht Treaty on European Union would not come to pass, but it did. And now there are a few observers suggesting that Economic and Monetary Union is doomed to failure.

Why? Because economic growth in Europe has been relatively low and unemployment is higher than the OECD average.

But we should remember that the European Union is a powerful union of 15 countries, including four of the G7 and two of the P5. The process of consolidation and strengthening through Economic and Monetary Union will only increase the EU's standing in the world of international diplomacy and trade negotiation.

The Implications of European Economic and Monetary Union

The Australian Government is following with considerable interest the next stages of Economic and Monetary Union.

The implications for Europe - let alone for Australia and the EU's other trading partners - are difficult to predict because of the uncertainties which still surround EMU, including the threshold question - whether it will proceed as scheduled on 1 January 1999.

More than that, the exact list of countries that will participate in the initial EMU-bloc is still unknown, and will remain so until at least early 1998. And we cannot be sure yet of the stance of monetary and fiscal policy under EMU.

In the case of monetary policy, it has been widely assumed that the European Central Bank will match the Bundesbank's low inflation objectives and pursue price stability. However, there is pressure in some quarters for monetary policy to adopt a shorter term focus.

Uncertainty also surrounds fiscal policy. While the Stability and Growth Pact provides for sanctions against countries which run excessive fiscal deficits, there is a degree of flexibility in the Pact's interpretation. For example, the European Council of Ministers of Finance has considerable latitude in deciding when an excessive deficit exists, and may take into account supporting evidence by the Member State involved - such as the cost to the German economy of German reunification.

The external value of the euro is also a matter for speculation. For example, the precise method for determining the conversion rate between participating national currencies and the euro has yet to be determined, although we know it must be determined by 1 January 1999.

Further, there are reports which have suggested competing views within Europe on whether the euro should be a strong currency - which would contribute to domestic price stability - or whether it should be weaker in an attempt to stimulate the EU's international competitiveness.

EMU will affect Australia through its impact on EU economic growth and the EU's international competitiveness, and therefore import growth.

It will also have indirect implications for Australian exports to, and investments in, third countries which supply the European import market. For instance, if EMU produces a stronger EU economy, Australian businesses with an exposure to the EMU-bloc will - other things being equal - benefit from increased demand for their product.

This will consequently have direct implications for Australian investors in Europe and Australian exporters to Europe.

The eventual emergence of the euro as a major international currency will also no doubt create significant structural changes in international financial markets.

The Australian Government has begun working with business to see how we can assist in preparing business for the introduction of EMU.

For example, we are currently looking at the question of the legal implications of the interpretation of contracts, both commercial and government, which extend beyond 1 January 1999 and which refer to existing European currencies.

Depending on the advice we receive, the introduction of EMU may require legislative changes to be made.

Of special interest to us is the impact on our trade and investment with those countries who have decided not to join the first wave of EMU or which do not meet the economic criteria to be selected in the first group.

The UK's position is of particular relevance, as the UK is by far our largest commercial partner in Europe. Regardless of the outcome of tomorrow's election, the UK is likely to remain outside EMU, at least in the short term.

As a result, Australian direct investors in the UK will continue to face exchange rate risk and transaction costs on any dealings with EMU-bloc countries. However, there are strategies available to reduce these risks, and many of you will already be investigating these.

And if, as its designers intend, EMU produces a stronger performance in its participant economies, those who invest in the UK will benefit from their strong links to those countries.

Strengthening Australia's Links with the European Union and its Member States

The Government is continuing to put a great deal of effort into its relationship with the EU and its Member states.

The close friendship between Australia and the EU has been underlined by the frequency of high-level visits in both directions since the Government's election. I will be visiting Europe at the end next month to further cement the relationship.

We are reinvigorating our extensive relationship with the United Kingdom this year through the `New Images' program which highlights the depth and modern character of our ever-evolving bilateral relationship. This program includes a major investment seminar in London in November which will draw together CEOs of British and Australian companies.

Australia's relations with Germany are developing apace. The Australia-Germany `Partnership 2000 Action Plan' promotes two-way trade and investment. This includes the promotion of German investment in Australia through a series of investment seminars in Germany targeting in particular medium sized companies.

The visit next week by Chancellor Kohl and other German Ministers accompanied by a large business delegation demonstrates the importance of this key bilateral partnership.

Australia's relations with France have improved significantly over the last twelve months.

The economic relationship with France has been growing strongly. The expansion of French direct investment here is particularly pleasing. There are now almost 200 subsidiaries of French companies in Australia and they employ around 41,000 people.

We have given Australia's important ties with Italy new life and vigour. In February this year, Australia and Italy issued a Joint Declaration which gave new impetus to the relationship. We have established an Australia-Italy Economic and Cultural Council which, among its many tasks, will focus on the development of commercial ties between Australia and Italy.

We must also recognise that challenges remain in the relationship - for instance access to the EU's agricultural markets and the impact of the EU's interventions on world agricultural markets. Nevertheless there is some cause for optimism that a range of internal and external factors will encourage further fundamental reforms of the Common Agricultural Policy. The Government will be working to encourage such reform.

Conclusion

All that I have said today shows that the Australia-European Union relationship is in good shape, and moving ahead impressively. I can say with equal conviction that the Australian Government remains committed to strengthening our bilateral relationships with the EU and its Member States.

The Government's 1998 Trade Outcomes and Objectives Statement will give special attention to Europe and its markets, reflecting their importance to Australia.

I believe that - while we continue to improve and expand government-to-government ties - it will be up to the business community, in the final analysis, to make the great potential that Europe and Australia offer each other a mutually profitable reality as we move together into the 21st century.