Dollar vs. Euro -A Question of Hegemony
By Syed Arif Hussaini

The U.S. dollar, the international currency of global commerce and of world reserves since the end of WWII, is currently under pressure to make room for the 5-year old European currency, the Euro.

The dollar accounts for about 2/3rd of all official exchange transactions; half of all world exports are denominated in dollars; so are all IMF loans; and it is the de facto world reserve currency. But, the real strength of the dollar lies in its position as the sole currency for all oil transactions (‘petro dollars’).

This status of the dollar is based on a tacit understanding with the Saudi royal family that they would accept payment for their oil in the U.S. dollars only. In return the U.S. would protect, through its mighty war machine, the royal family’s right to rule. There is, however, no international commitment or compulsion that the dollar will be the only monetary instrument for payments for oil. It is the oil producers, the members of OPEC, who demand payments in dollars. Every one accepts dollars because dollars can buy oil -the most crucial commodity for manufacturing, energy, communication etc.

Only the U.S. can print the dollars and pay them to various nation states in return for their commodities and services. The nation states give a bulk of them to OPEC members for oil, who in their turn recycle them back into the U.S. through purchases of Treasury Bills, U.S. stocks, real estate, etc.

The world’s interlinked economies compete now chiefly to capture the needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies. This hegemonic position of the dollar is sustaining the status of the US as the supreme economic power despite constant current account deficits and the biggest national debt. The U.S. national debt by April, 2003 had already crossed $6 trillion against a gross domestic product of $9 trillion.

An analytical article appearing on the front page of the L.A. Time of November 14 mentioned that the dollar had dropped in the first week of November “to a record low against the 5-year old Euro ($1.30=E 1), a 12 year low against the Canadian dollar ands a nine year low against an index of major currencies”. Many analysts don’t see anything that will stop the decline. Foreigners who had been buying almost half of the U.S. bonds and securities, the country’s IOUs, were conspicuous by their absence when the treasury bonds were offered for sale on September 9. Fortunately, the buyers returned soon after, ending the ensuing panic.

“We are borrowing”, remarked Pat Buchanan in his latest book “$1 trillion a year to finance our new empire, our welfare-warfare state, and our binge-buying at the malls.”

Considering the crucial role of the dollar in the world trading system, particularly in respect of oil, Saddam Hussein sealed his fate when he decided to switch to the Euro in November, 2000, as he did not want to deal ‘in a currency of the enemy’. Not only that, he later on converted his $10 billion reserve fund at the UN, accumulated through the facility of ‘oil for food’, into Euro @ $ 0.82= E 1.00. This subversive step caused, as expected a fall in the par value of the dollar as against the Euro. Within a year, the Euro was selling for $1.05. Iraq’s move also created a momentum among other OPEC countries towards Euro as an oil transaction currency standard. That had to be stopped, Iraqi oil well captured, a pliable regime installed that may enable the U.S. to smash OPEC’s hold over oil prices.
The other major oil producing country, Venezuela, fourth biggest oil producer, shifted to barter deals by accepting from its South American neighbors products and commodities for its oil. That brought the wrath of the U.S. against President Chevez.

North Korea, a member of the Axis of Evil, has already dropped the dollar in favor of Euro as the currency covering its trade.

Another member of the Axis, that has been stepping out of line, is Iran. It has already converted a major portion of its central bank reserve funds to the Euro and has been debating the pros and cons of a total shift to Euro in its oil exports. It is constantly being charged of enriching uranium to acquire atomic weapons, despite its solemn assurance that it had stopped the project, and despite the certification of the concerned UN agency -IAEA- that the country was no longer engaged in such activities. That reminds one of the Weapons of Mass Destruction (WMD) charge against Iraq, or the tiger of the fable accusing the ewe of roiling the stream water.

Iranians should be seeing clearly the writing on the wall and may therefore avoid “the Great Satan” outlook and adopt, one hopes , a pragmatic strategy like that of Col. Gaddafi of Libya.

Some members of OPEC expressed an interest, at their meeting in Spain in mid April, 2002, in leaving the dollar in favor of the Euro.

The U.S., it might be relevant to point out, has been tolerating the OPEC cartel since 1973 as the members have been investing their surplus petro-dollars in U.S. economy, by buying the U.S. treasury bonds (IOUs), stocks, real estate, etc. If members of OPEC do adopt a firm stand against the dollar, it might toll the bell for that organization itself. The ruling neo-conservatives cannot be expected to be tolerant of such moves which remove the main fiscal pillar on which the economy stands. The administration stands committed that it would not enhance taxes or impose any new levy. It cannot reduce the defense expenses and withdraw troops from over 100 foreign countries.

As for the erosion of the value of U.S. dollar, it is attributable to a huge budget deficit -$413 billion in fiscal ending Sept. 30, 2004- an enormous trade deficit -for every $20 of exports, the imports were $36- the current account deficit has risen from 1% of GDP in 1990 to 5.4% now. To maintain the status quo, government will have to request the Congress to raise the government’s $7.4 trillion debt ceiling so it could borrow more money to maintain current level of consumption.
A sinking currency represents the silent theft of a people’s wealth by their rulers, argues Buchanan. “You cannot run a world empire on a collapsing currency”.

But it would be wise to remember that the U.S. has a war machine which cannot be trumped by all the armies of the world combined and the U.S. has no hesitation in exercising its policy of preemptive strike. It would go to any extent to fend off any attempt by OPEC or any of the oil producing countries to dump greenbacks.

As the eminent historian, Arnold Toyenbee, has found no civilization has ever been destroyed by any outsider until it has started eroding from inside. The U.S. will have to be wary of its economic implosion much more than using its stick against anyone who is not servile and obsequious to its will. - November 17, 2004

Editor: Akhtar M. Faruqui
2004 . All Rights Reserved.