CHAIR —Good morning and welcome. I declare open this public meeting of the Senate Foreign Affairs, Defence and Trade References Committee, which is inquiring into the matter of economic, political and social change in Japan and its implications for Australia.

I welcome to this hearing Mr Aneurin Hughes of the European Union's commission delegation to Australia and New Zealand. The committee prefers all evidence to be given in public, but should you at any stage wish to give any part of your evidence in private, you may ask to do so and the committee will consider your request. The committee has before it a written submission from the commission. Are there any alterations or additions you would like to make to the submission at this stage?

Ambassador Hughes —No.

CHAIR —I now invite you to make an opening statement and then we will proceed to questions.

Ambassador Hughes —Thank you very much for inviting me. Could I start off by saying that the timing is very opportune, since this weekend we have just had the most recent EU-Japan summit held in Bonn in the margins of the G8 committee. Unfortunately, the distance being what it is, we have not had a full report of that meeting as yet.

However, earlier this month, speaking on the overall situation of EU-Japan relations, Sir Leon Brittan, who is the commissioner responsible in Brussels, said that EU-Japan relations were in as good shape as they had ever been. He noted that the relationship had gone far beyond the narrow confines of trade issues. They were now much broader and more strategic. They covered political issues, economic issues and issues of cooperation. In his view, this was a reflection of a very welcome engagement by Japan in wider world affairs.

The meeting this weekend had as a backdrop a fairly dismal four years as far as the Japanese economy was concerned. Despite some of the recent indications of a possible rebound in that economy, it culminated in five consecutive negative quarters of growth up to December 1998.

We have to recognise, however, that Japan has had to face not only an economic challenge but quite severe political challenges as well. These were highlighted, I think, in Prime Minister Obuchi's speech to the Diet in January, where he said more or less that, as values in Japan diversify and the world undergoes great transformation, the systems and decision making processes which once allowed Japan to effectively manage the country, are now holding back progress. We in the union recognise the considerable economic reforms that Japan has effected, and we recognise the significant effort that that has required. We actually believe, however, that there is need for more structural reform, especially in the area of regulation.

As far as Japan's external environment is concerned, I think we also have to recognise that that environment has been changing rapidly. Perhaps the severest test that it faced was with respect to the Asia crisis. It is perhaps remarkable that the largest economy in the region, one which accounts for something like two-thirds of all regional GDP, has been unable to lead Asia out of that recession. It has not been able to absorb more imports from, nor has it been able to invest in, the other countries in Asia, especially in South-East Asia.

Nevertheless, you have to recognise that Japan has contributed something of the order of $57 billion in assistance to the region, including contributions to the IMF package and, of course, the EU contribution which is the largest element in it. However, we feel that perhaps Japan's contribution has not fully measured up to the expectations of some of the other countries in the region and we would perhaps note that this could have political consequences for Japan's role in Asia in the future.

I will look now at some countries briefly in terms of their relationship with Japan, and begin with China. There seems to us to be diminished enthusiasm in Japan at the moment at a business level for closer contact and relationships with China. Our reading of the visit of the Chinese President Jiang was that it did not lead to a particular strengthening of mutual ties. However, both the European Union and Japan have a very shared objective, and that is of trying to ensure a greater degree of Chinese integration in the world system and also of membership of the World Trade Organisation.

We believe that Japan's greatest security concern is North Korea. Japan is a board member of the KEDO, along with us, the United States and South Korea. Japanese funding to KEDO has been temporarily suspended, as the committee will know, following the missile that went over Japanese territory last August. Relations are much improved with South Korea, especially after the very successful visit by President Kim to Japan in October of last year.

As far as the United States is concerned, Japan's security relationship with the United States remains fundamentally strong, although we have to note that there are tensions in certain other areas, for example in the area of economy and trade, especially when in November of last year Japan was unable to endorse the APEC sectoral liberalisation initiative covering forestry and fish. There is also a growing trade surplus with the United States of the order of $64 million in 1998.

In terms of engagement further afield, we note with great delight Japan's increased commitment to bring assistance to the world trouble spots, especially in terms of working with ourselves and the United States, for example, in the Middle East. And particularly as far as we were concerned, most recently Japan provided assistance in the Balkans. We have to acknowledge something of the order of $200 million worth of assistance provided by Japan to Kosovo and to the surrounding countries. It is noteworthy also that Japan is the single largest nation state provider of overseas development aid. Of course, they are playing a full part not only in ASEAN, APEC, G7 and G8, but also in ASEM as well.

As far as the union is concerned, the EU has not traditionally been among Japan's first order of political priorities, but we reckon that has changed recently and there is an indication of considerably more interest.

One reason for this, of course, has been the launch of the euro. It has had a noticeable effect on Japanese perceptions of the importance of the European Union. That was remarked on by Prime Minister Obuchi when he visited Germany, France and Italy earlier this year in January. For Japan, we believe that the euro constitutes both an opportunity and a challenge. It is an opportunity in the sense that Japan can see and believes that the euro will develop—how quickly, it is open to question—as a second world currency alongside the US dollar. That will mean far greater stability in world money markets, and it will also allow for far greater portfolio diversification than in a situation when you have only one world currency.

I think it is a challenge because there is little doubt that the euro is going to strengthen the EU's role in the world in international concerns and in international monetary matters and, therefore, that could have an effect in reducing Japanese influence. We noted that it was very interesting also that Japan recently called for a kind of tripolar management of the world economy.

We signed a joint political declaration with Japan in 1991. However, I would not argue that it has been brilliantly followed up since 1991. There are considerable weaknesses. Initially, there were questions by Japan as to whether the European Union was a real, valid interlocutor for a lot of their interests. Secondly, I think Japan was rightly—and that is my comment, not an official commission line—critical of the common foreign and security policy and the lack of progress by us in that direction. There has not been very significant joint action or analysis between us. So one of our aims—and I think that will be shared by Japan now—is that we have to make considerable improvement in this political area.

We have some key issues that we would like to see develop jointly between us and Japan. The first, of course, is North Korea. The second is China's evolving political, economic and security role in the region. The third is evolution of security structures in the region. The fourth is the impact of unilateral and extraterritorial policies on Asia as a whole.

To turn briefly to trade and investment relations, I note to start with that, together, Japan and the European Union account for roughly 43 per cent of the world economy. Japan is the European Union's third largest export market and the second most important source of our imports. If you look at the three branches—merchandise trade and investment and services—briefly, the position is as follows. On merchandise trade, we have a deficit, a big one and a growing one. It grew by something like 43 per cent just last year. On services, we are in surplus, but it is much smaller than our deficit on merchandise trade. On investment, the picture again is one of a very big imbalance on FDI, where Japanese foreign direct investment in the European Union is seven times higher than our investment in Japan. One of the reasons for that is that, traditionally, it has been very difficult to invest in Japan. We have been hindered always by the almost impossibility of getting into mergers and getting acquisitions. This is changing, but it is changing very slowly.

However, I think our major concern as the European Union is the question of market access barriers. Most of these are regulatory in nature. Last year, for example, we produced a list of over 200 proposals for deregulation in Japan in areas such as distribution, competition policy, administrative procedures, to mention just three. With the Japanese, every year we now have two meetings a year just looking at deregulation proposals—our's for Japan and Japan also as far as the European Union is concerned.

I should perhaps mention two recent initiatives. Firstly, we are working together in making preparations for the WTO millennium round and working very well together. Secondly, we believe that there should be a considerable reinforcing of business dialogue. We are hopeful that, just as we did with Australia, we sign a mutual recognition agreement on conformity assessment. We were hoping that this could be signed on the weekend. I do not know if my friend the Japanese ambassador has more recent news on whether or not we did, in fact, sign it, but it was certainly on the agenda for this weekend.

To conclude, there are, of course, many other areas of cooperation between us in research and development, education, electronic commerce, fisheries. Now we are getting I would not say into bed but into discussions on third pillar issues. For us, third pillar issues are all those that are covered by justice ministers—for example, drugs and organised crime. To summarise very briefly, what you see is a pattern of considerable, but gradual, improvement. We have not yet, in terms of EU-Japan relations, achieved our full potential but, brother—as somebody else said—we are on our way. Thank you.

CHAIR —Thank you very much, Mr Hughes. Senator West?

Senator WEST —Can I just pursue the deregulation issue a bit more with you. You said that there were over 200 items listed. You have been putting up these lists on an annual basis now for a number of years, haven't you, at the EU?

Ambassador Hughes —I am sorry—

Senator WEST —You have been putting up lists of items for deregulation over a number of years. In your submission, you rated the overall degree of compliance as patchy. What do you think are the main obstacles in achieving this deregulation objective?

Ambassador Hughes —I can only answer in fairly general terms. Firstly, it is the change in the nature of how business operates in Japan. I think the indications right at the beginning of my submission today were that slowly that is easing up. In other words, the relationship between the public and the private sector, which was so tight and inimical to other interests coming in—for example, I referred to mergers and acquisitions—is slowly loosening up. We would see that as fairly fundamental in a better development in the future. Secondly, there is a generational issue in Japan, which is interesting, between the younger business element, say, under 45, and the older one, the younger one being much more open to a far greater degree of liberalisation.

Thirdly, in the area of deregulation, there are two policy areas of specific importance for us: one is in telecommunications and one in competition policy. It is these two that have been particularly disappointing from our point of view in terms of opening up. The other point on this is that the more that Japan engages—this welcome engagement that I noted over the last four years—the more you will find that the WTO umbrella creates a greater atmosphere for further deregulation in the future.

Senator WEST —Is there a reciprocal commitment on the EU to make changes to its regulations?

Ambassador Hughes —Yes, last year the Japanese came up with five or seven lists of issues which they regarded as requiring deregulation by us. They did not include common agricultural policy for reasons that the committee will well understand.

Senator WEST —Oh, I thought they might have! I would have been interested to pursue that; another time, another place, I guess. In what sorts of areas are they seeking reciprocal commitments from the EU?

Ambassador Hughes —One in the past has been cars or automobiles. There was a specific problem in Italy where there was almost a zero import of Japanese cars. I would have to come back on some of the other areas.

Senator WEST —That raises an interesting question in my mind. You have the European Union; you also have national sovereignty of your member states underneath that. How do you undertake a relationship at an EU level, and still maintain the independent sovereignty of the sovereign states underneath it, but maintain overall EU control? This is probably going to the heart of it.

Ambassador Hughes —By exercising very considerable care and prudence. In other words, in the commission we have to be very careful that we are absolutely correct in terms of fulfilling our mandate and not stepping on the toes of national interests. In the area of trade negotiations, for example, Japan is our second most important partner. That area of responsibility is clearly the area of the union. For all multilateral trade negotiations, the European Union negotiates on behalf of its member states. However, we do not get into the business of, let's say, trying to boost sales of British cars or Italian footwear into Japan. That is a matter for a member state itself.

The regulatory framework within which we operate is the European Union's. How do we formulate that? We formulate that largely with the involvement of the member states via the Council of Ministers in Brussels. There is a permanent committee, called the 113 committee, which looks at trade issues. It is there that the specific voice of nation-states would be made felt. Over the years, there has developed a fairly clear picture of what is strictly a national state interest and what is the community responsibility.

Senator WEST —Whilst there are bilateral agreements with Japan from the member states, what do you call the agreements between the EU and Japan? Are they bilateral or multilateral?

Ambassador Hughes —Those would be multilateral.

Senator WEST —So there are no overlaps?

Ambassador Hughes — I do not think I know sufficient about it to be able to decide whether there are overlaps or not. By and large, I think overlaps are pretty rare. There is a fairly common line that we have established in terms of where we want to go with our relationship with Japan. I honestly do not know of any real problems of overlap where a member state has complained that the union has been usurping their patch or anything. I think it is pretty clear.

Senator WEST —And they would be quick to do that?

Ambassador Hughes —I think they would.

Senator WEST —The constituent members of the EU have undertaken a fair bit of deregulation over the last 15 to 20 years.

Ambassador Hughes —The question that was raised when President Delors was there with Lord Cockfield was: what was the cost to Europe of member states going it alone on, say, trade issues? The answer to that question was so awful that it was possible to bang heads together around the council table and say, `Look, if we start acting together and deregulating some of these national hindrances to free trade, we could add something like five million new jobs and we could probably boost the GDP of the European Union by up to two per cent'. That was in a famous report called the Ceccini report.

As a result of that, you had a combination of the kind of brilliance and vision of the Frenchman Delors and the hard, down-to-earth practicality of Lord Cockfield. That combination was very powerful. It meant we then put forward the order of 283 proposals for creation of a single market and most were in the area of deregulation. We talked at that time of a Balkanised Europe as being the `before' and a single market as being the `after'. That was the single, most important development in our trading relationships, and not only internally but externally as well.

Senator WEST —Are there any lessons that Japan can learn from or look at in the deregulation that the European Union has undertaken?

Ambassador Hughes —We would argue very strongly yes, but they are, of course, very different. For us it was the question of trying to get 15 nation states, sovereign states, to understand that some common goals were more important for their individual state and not just for the family as a whole, and that was very difficult. In Japan they have to deal with a traditional way of doing things, with fairly rigid relationships between the different players on that scene, and bringing them more into what would be the international framework of a globalised set of arrangements for trade. So they are different relationships, but it is actually going away from a situation that has existed for a long time and bringing it more up to the mark as far as the demands of the modern world are concerned.

Senator LIGHTFOOT —You mentioned there are 200 items that your commission has a list of with respect to those that you would like deregulated in Japan. What about the reciprocal markets that there are restrictions with in the union itself: primary production, other farm produce, some electrical goods? How are they today in terms of barriers, whether or not those barriers are ones that are contrived, as the French did with respect to video recorders by only having a handful of inspectors to inspect 100,000 of them, so that besides the mountain of butter and the mountain of beef you also had a mountain of Japanese video recorders? What are the impediments in Europe that the Japanese suffer? I know there are some that inhibit trade with Australia.

Ambassador Hughes —We do not have mountains of beef any longer; we had a reform of the Common Agricultural Policy at the beginning of the 1990s, and that is gone. Hopefully, we will go a bit further. However—

Senator LIGHTFOOT —But some impediments still exist?

Ambassador Hughes —Yes, but as far as the reform of the agricultural policy is concerned there is not that degree of interest as far as Japan is concerned in it. The Japanese have major problems of their own in terms of protection of some of their agricultural products which, for Australia, are much more significant, I would argue.

Senator LIGHTFOOT —Yes, that was really the thrust of my question. I was really saying that while you have impediments to other countries, doesn't that then give the domestic markets in Japan an excuse to put up barriers or impediments to Europe?

Ambassador Hughes —No. As far as Europe is concerned, in relation to impediments like the ones you mentioned—there was a question of video recorders and of cameras at one stage: not only did you have a limited number of people, the French on one occasion said you could only bring them in in one port and nowhere else—I think we have got rid of that, but these would be the areas in which Japan would have a particular interest in removing existing barriers. If I say that by the end of this year, for example, the average of our tariff barriers to trade with the Third World will be significantly reduced and the average will be down to about 3.7 per cent, it will give you an indication. So, as of the year 2000, that will be the average trade tariff barrier—3.7—which is pretty low. In agriculture it is a different ball game but it is much more affecting the countries which are agricultural producers, such as Australia and New Zealand, than it is a country like Japan, which is an industrial country.

Senator LIGHTFOOT —So any export incentive scheme that the European Union would shelter behind is to be lowered? You have mentioned a date at the end of the year. Are they going to be lowered?

Ambassador Hughes —They will all be done. The average tariff will be 3.7.

Senator LIGHTFOOT —Is that the average farm produce tariff?

Ambassador Hughes —No, the average industrial tariff, right across the board, will be 3.7.

Senator LIGHTFOOT —But what about those tariffs applying to farm produce?

Ambassador Hughes —The commission proposed, for the latest reform package, a greater reduction in the sectors of dairy, beef and cereals than member states could agree to. We have still further reduced from the base figures of the McSharry reforms at the beginning of the 1990s, but member states were not prepared to go right the whole hog that we wanted. Nevertheless, we still are the largest importing part of the world as far as farm produce is concerned. That will continue to be the case. The commission's policy is that we will eventually get rid of all production tariffs. That is accepted as a principle. Member states are able at the moment to secure a majority that says, `We will go at it a bit slower than the

new commission would like.' But the acceptance is there that we get rid of all production tariffs and that in the future there would only be revenue support.

Senator LIGHTFOOT —When will the principle be implemented? When will there be some manifest sign that those tariffs that apply particularly to farm produce would be reduced or negated completely? When is that coming in?

Ambassador Hughes —The proposals have been around for two years. I was in Brussels recently and talking to Commissioner Fischler, and I think the intention is quite clear that we will bash on to try and get the further reform that we need. There are a number of pressing reasons why we should do that—and I am speaking very much with the commission hat on at the moment. One pressing reason is that we have got the WTO and we have got the Millennium Round about to start, hopefully, if we can come to any agreement about the WTO secretary-general, but hopefully it will start in Seattle. WTO pressure will be for further liberalisation and we are committed to that as much as anybody else. So that is one incentive for further agricultural reform.

The second one is enlargement. We are going to enlarge to take in nearly 100 million other people from eastern central European countries. With a country like Poland with a huge population, of 39 million, and with perhaps 30 per cent plus involved directly with agriculture, if you applied the CAP as it stands at the moment we could not afford it because you would have to probably double the farm budget, which is already taking about 50 per cent of the total. No member state is going to be able to wear that, so there is going to be huge pressure for further reform if we are going to be able to successfully manage enlargement. So there are a number of pressures which would suggest that the principle of eventually getting rid of all production subsidies would be attainable, I would say, within the next quinquennium.

Senator LIGHTFOOT —You have a forum or several fora with Japan to discuss impediments to bilateral trade. Do you have a similar forum for discussing those sorts of problems with the United States market which—the United States officials say, using the export incentive scheme of the United States—are imposed because of the protective barriers with respect to farm goods in the European Union? Do you have dialogue?

Ambassador Hughes —Yes.

Senator LIGHTFOOT —How is that expressed?

Ambassador Hughes —With the United States we have a regular ongoing dialogue at different levels. As you know, we have major issues with them in the commercial field at the moment, whether you are talking about bananas, whether you are talking about GMOs, whether you are talking about hormones, all the rest of it. You can take it at the level of Sir Leon Brittan and Charlene Barshefsky; you can take it at the level of the North Atlantic group meeting between us, which meets on a very regular basis; and then they have a very large representation in Brussels as well as a very, very significant US Chamber of Commerce. So I would say that, in terms of the US, that kind of dialogue debate is going on all the time.

The big problem in terms of our relationships with the United States is that very often you can come to a meeting of minds when you are dealing with United States representatives—that is, people coming from their various ministries—but it is always ad referenda. In other words, they have to go back to Congress before the deal can be struck. It is in that interchange where you get the pressure groups coming in from all over the United States and saying, `There is no way you can do a deal on that.' It has been a continuing and everlasting problem as far as our dialogue is concerned, and I suspect that in Australia you would find the same thing.

Senator LIGHTFOOT —I will get back to Japan. I am magnetically drawn to asking you other questions that would more directly affect Australia, but let me get back to the subject matter before us today. How do you see the 1.9 per cent quarterly growth in Japan? Do you see that as coming from a low base where there was only one way and that was up, or do you see that as something more than encouraging? Obviously, it is encouraging, but do you see something that is going to be sustained in the quarters to come?

Ambassador Hughes —I am not an economist but having read the various bits of paper, yes, it is very encouraging, but we do not think that that is necessarily going to mean that they are out of the woods. Not yet. We think that there are some encouraging signs but we think that you might have a reversal when you look at the results for the next quarter. They have had five quarters of absence of growth, rather digressivity. I think that this 1.9 per cent is in the category of the old English phrase, `One swallow does not make a summer.' I do not think the summer is there yet.

Senator LIGHTFOOT —In terms of the stimulation of its domestic economy, which most economic pundits and economic forecasters and well respected economists say is an integral part of the recovery of Japan, do you see there an incentive for the Japanese government to increase its spending? Remember, other economies of the world have spent their way out of recessions. Do you see a likelihood that the Japanese government may enhance their self-defence forces as part of the domestic spending program to stimulate the economy?

Ambassador Hughes —I do not know about the defence forces but Prime Minister Obuchi has made clear that there will shortly be an attempt to boost domestic demand with an amount of money that will go into the economy. While we are welcoming this, we do not think it is enough to drag the economy out of the depression that it is in at the present time. As far as being the kind of motor force that is going to lead the South-East Asian countries out of their recessions, we do not think that that is going to happen either.

Senator LIGHTFOOT —I think growth in China this year is 8.7 per cent and next year it is 7.6 per cent, or about those figures. They may not be precise figures but they are within a point or two. Given that, do you see the continuing growth in China as influencing in a marked way the regrowth in Japan? It is a reasonable growth rate, isn't it? It is faster than anything in the OECD countries, and with an unemployment rate of 6.5 per cent in China, it looks pretty good if those statistics are correct.

Ambassador Hughes —That is a very interesting question. Frankly, I do not know what the commission's response would be to it. Of course, the base rate from which they start is

much lower than anybody else and so you have to look to China almost on a sui generis basis, looking at it on its own. Our view is that if they are able to sustain that kind of growth rate in the future, it has very considerable implications for the countries in the area, including Japan. I think Japan is looking at it with considerable intensity.

At the same time I have to say that at the recent ministerial meetings in Brussels with Deputy Prime Minister Tim Fischer and Sir Leon Brittan, both had recently been to China, within about two weeks of each other, and had had discussion with the Chinese leadership, and both came away fairly depressed. They could not put their finger exactly on it but they had found, compared to previous discussions with the Chinese leadership and visits to China, that on this occasion there was a greater degree of depression among the Chinese leadership—pessimism—than there had been before.

It is very difficult to say why, but it was quite notable, and it was quite remarkable that the two had had exactly the same view. I think there would have to be lots of important questions about China. But the overriding basis of Japan and our approach to China is greater involvement, greater involvement, greater involvement.

Concerning the WTO, we have some conditions for Chinese membership which I think are perhaps a little bit tighter than Japan's, but both of us would wish China to be in that forum as soon as feasible.

Senator LIGHTFOOT —Do you think that since the launch of the euro that any significant purchase of the euro by Japan has impeded the recovery of Japan?

Ambassador Hughes —No, I do not think so. I think that is quite separate. The launch of the euro has been much more a phenomenon, first of all, in Europe itself. Secondly, it has had a very significant effect on the portfolio market in the world. The latest figures that I saw suggest that something in the order of 45 per cent of all portfolios taken out worldwide are now denominated in euros. That, I would suggest, is perhaps a more potent augury for its future wellbeing than the decline of 11 or 12 per cent to the dollar.

In terms of impact on the Japanese economy, I do not think it has had any particular significance, other than the two I mentioned, namely, that Japan is going to take the European Union much more seriously now because of the euro and it is going to see it as both a challenge and an opportunity.

Senator LIGHTFOOT —What would you see as the cause of the decline in the euro relative to the US dollar since the launch of the euro?

Ambassador Hughes —I would say there are two principle reasons: the first is the strength of the American economy and the overvaluation of the dollar. How long the US is going to be able to maintain its position as the country with the biggest overseas deficit in the world I do not know. That is one reason. It is more the strength and vitality of the economy than any inherent weakness in the euro.

The second thing is that as long as you had the tragedy of Kosovo, it did not do too much for business and investment confidence.

Senator LIGHTFOOT —Notwithstanding that, the American economy looks impregnable, it looks invulnerable. It looks as if it is going to go on at the rather steady pace now that it has. It just takes a word from Dr Greenspan to steady the flow or add to any inflationary measures in the economy, and that will no doubt increase interest rates. What is your view of the American economy because all of Europe is dependent on that? Also, the Japanese economy is dependent on a healthy American economy given the balance of trade deficit that America has with Japan. How do you see the American economy going?

Ambassador Hughes —It depends on what time span you want to look at. For example, if you look at the American dollar in the early 1990s it was very weak. In the late 1990s it became very strong. The combination of these two factors had a disastrous effect on South-East Asian and Asian countries.

Senator LIGHTFOOT —Isn't the potential for that scenario still there?

Ambassador Hughes —It may well be but I am saying that the combination for a period of a very weak dollar and then suddenly a very strong dollar combined was one of the causative effects, we would argue, for the depression that occurred in South-East Asia in the last 18 months. I think you then have to look first of all as to what is going to happen in the world money market. Is the euro going to become a second reserve currency quickly or in the medium term? If it happens quickly then I think that will have a knock-on effect on the American economy. If it is in the medium term and more staggered then the impact, of course, will be lessened. I do not know. I am not an economic guru nor a monetary one but certainly I would say that the euro will have a distinct impact.

I think the second thing is that with the Kosovo issue hopefully now solved and despite the ongoing commitment we are going to have to make—and it is mainly the European Union that is going to have to pay for rehabilitation of that area—I still think that you will find that growth rates in the European economy will start picking up as of the end of this year. Forecasts are already suggesting that we will be looking not too bad for the 1999 final figures and will improve up to possibly a 2.7 growth rate for next year. I think that is going to have an impact as well. Our assessment as far as Asia is concerned is that you will find that within about two years Asia's economies, if not completely rehabilitated, will be out of that recessionary trend and that that will have a good positive effect on the world economic situation also.

Senator LIGHTFOOT —I have one more very brief question because we are beyond time now, Mr Hughes. It seems to me that there is something of a dichotomy between the exploitation by investors of the American dollar given the deficit that applies in the United States and the aggregation of that deficit and the non-acceptance, at least in the terms of what it was aspired to be, of the euro. The dichotomy is that the United Kingdom is selling 415 tonnes of gold into a diminishing market and the German Central Bank is going to sell 10 million ounces of gold. That seems to me to be almost an act of economic stupidity given that the price of gold has retreated to where it is today. There must be some confidence in the US dollar that is inexplicable and some lesser confidence, but confidence nonetheless, in the euro when two of the powerful economic forces of Europe are to sell off significant parts of their hard reserves into what is obviously something that is anticipated. At $US259 that is

not going to cover some of the gold that Europeans have bought over the past decade. What is your opinion of that briefly?

Ambassador Hughes —I have a very personal opinion of that. It was very interesting to note that the increase in exports from Australia to the European Union last year was the biggest ever and that was of the order of 34 per cent.

Senator LIGHTFOOT —That was in despite of all those tariff barriers, Mr Hughes.

Ambassador Hughes —Or was it 22 per cent? Do not quote me on the figures but your increase to the UK was completely unprecedented. Why? Because of a large percentage of it being gold. Australia sold a heck of a lot of gold—

Senator LIGHTFOOT —At a lot more than $US259.

Ambassador Hughes —into the UK last year and then the UK decided that it is going to sell all that gold off.

Senator LIGHTFOOT —That is the dichotomy I do not understand, Mr Hughes.

Ambassador Hughes —No, I do not understand it either. The only suggestion I would make is, if you take the European Central Bank, when it was set up it took a decision that 15 per cent of its reserves only would be held in gold. So each participating country puts X amount of gold in it. The amount of gold that was held by the whole of the countries at that time was something of the order of 1,300 tonnes, if my memory serves. Now with two countries talking about selling off significant amounts of gold, you have to wonder whether the same thing could happen to gold as happened to silver.

If you remember in the old days, silver was pegged to gold very strictly and it also constituted some kind of international currency. Then that was dropped and silver is no longer regarded as currency. You just have to wonder whether gold is going to continue being a kind of reserve currency as it has been. I know that is not particularly good news for Australia. On the other hand, you hear reports that there is a new breakthrough in fuel cell technology with the use of porcelain that is going to require gold in it, so you do not know. It is a very interesting question.

Senator LIGHTFOOT —Thank you, Mr Hughes.

CHAIR —Thank you very much. It is not that I do not have interests. My other colleague, Senator West, has canvassed a number of issues as well. In the interest of time, as we have a fairly tight schedule this morning, I will resist asking questions. That certainly is not a lack of interest on my part. Thank you very much for your attendance and we appreciate your evidence.

[10.28 a.m.]