The Euro and the war on Iraq

Hobbes

Got it in the mail. Intresting.

The Euro And The War On Iraq
By Amir Butler
ATrueWord.com
info@atrueword.com
3-29-3


As Mark Twain once noted, prophecy is always difficult, particularly with regards to the future. However, it is a safe bet that as soon as Saddam is toppled one of the first tasks of the America-backed regime will be to restore the US dollar as the nation's oil currency.

In November 2000, Iraq began selling its oil for euros, moving away from the post-World War II standard of the US dollar as the currency of international trade. Whilst seen by many at the time as a bizarre act of political defiance, it has proved beneficial for Iraq, with the euro gaining almost 25% against the dollar during 2001. It now costs around USD$1.05 to buy one Euro.

Iraq's move towards the euro is indicative of a growing trend. Iran has already converted the majority of its central bank reserve funds to the euro, and has hinted at adopting the euro for all oil sales. On December 7th, 2002, the third member of the axis of evil, North Korea, officially dropped the dollar and began using euros for trade. Venezuela, not a member of the axis of evil yet, but a large oil producer nonetheless, is also considering a switch to the euro. More importantly, at its April 14th, 2002 meeting in Spain, OPEC expressed an interest in leaving the dollar in favour of the euro.

If OPEC were to switch to the euro as the standard for oil transactions, it would have serious ramifications for the US economy. Oil-consuming economies would have to flush the dollars out of their central bank holdings and convert them to euros. Some economists estimate that with the market flooded, the US dollar could drop up to 40% in value. As the currency falls, there would be a monetary evacuation by foreign investors abandoning the US stock markets and dollar-denominated assets. Imported products would cost Americans a lot more, and the trade deficit would be magnified.

It is foreign demand for the US dollar that funds the US federal budget deficits. Foreign investors flush with dollars typically look to US treasury securities as a means of secure investment. With a large reduction in such investment, the country could potentially go into default. Things could turn very bad, very quickly.

In May 2004 an additional 10 member nations will join the European Union. At that point, the EU will represent an oil consumer 33% larger than the United States. In order to mitigate currency risks, the Europeans will increasingly pressure OPEC to trade in euros, and with the EU at that stage buying over half of OPEC oil production, such a change seems likely.

This is a scenario that America cannot afford to see eventuate. The US will go to any length to fend off an attempt by OPEC to dump greenbacks as its reserve currency. Attacking Iraq and installing a client regime in Baghdad may have a preventative effect. It will certainly ensure that Iraq returns to using dollars and provide a violent example to any other nation in the region contemplating a migration to the euro.

An American-backed junta in Iraq would also enable the US to smash OPEC's hold over oil prices. The US or its client regime could increase Iraqi oil production to levels well beyond OPEC quotas, driving prices down worldwide and weakening the economies of the oil producing nations, thus lessening their likelihood of abandoning the dollar. It would have the short term effect of reducing the profits of domestic oil companies, but the long term effect of securing America's economic hegemony.

The frequently offered canard of the Left that this war is being fought to secure oil revenues for American oil companies may have some truth to it. However, a more plausible explanation may be that the Bush administration is waging war to protect the dollar and smash the OPEC hold over international oil prices. It's a war whose purpose is bigger than Halliburton or Exxon: it's a war being fought to maintain America's position in the world.

Attending the 1992 Earth Summit in Rio, George Bush Senior told the world that, "the American way of life is not negotiable". As cruise missiles rain on Iraq, we are learning just how 'non-negotiable' that way of life really is.

Amir Butler is executive director of the Australian Muslim Public Affairs Committee (AMPAC), and writes for ATrueWord.com. He can be contacted at abutler@atrueword.com.

Hobbes

Now that I have a little time to comment on it.

While it certainly is an intresting take on why there is a war I doubt Saddam gets all the credit.

The policies put in place after 911 are what caused a massive migration from the $ to the €. Middle Eastern companies didn't want to keep the funds in the US as under the new laws they could be seized by the US.

davej

A simple explanation of the theory can be found here:

http://www.pubtheo.com/page.asp?PID=1181

However I have yet to hear any articles by recognised economists that support it. Moreoever people like Professor Faulhaber dismiss it as total rubbish. These articles do seem to appear on websites with urls like "free" or "truth" such and such.com.

davej


<snippet>
HOW DOES THE US GET ITS DOLLAR ADVANTAGE?

Imagine this: you are deep in debt but every day you write cheques for millions of dollars you don't have -- another luxury car, a holiday home at the beach, the world trip of a lifetime.
Your cheques should be worthless but they keep buying stuff because those cheques you write never reach the bank! You have an agreement with the owners of one thing everyone wants, call it petrol/gas, that they will accept only your cheques as payment. This means everyone must hoard your cheques so they can buy petrol/gas. Since they have to keep a stock of your cheques, they use them to buy other stuff too. You write a cheque to buy a TV, the TV shop owner swaps your cheque for petrol/gas, that seller buys some vegetables at the fruit shop, the fruiterer passes it on to buy bread, the baker buys some flour with it, and on it goes, round and round -- but never back to the bank.
You have a debt on your books, but so long as your cheque never reaches the bank, you don't have to pay. In effect, you have received your TV free.
This is the position the USA has enjoyed for 30 years -- it has been getting a free world trade ride for all that time. It has been receiving a huge subsidy from everyone else in the world. As it debt has been growing, it has printed more money (written more cheques) to keep trading. No wonder it is an economic powerhouse!
Then one day, one petrol seller says he is going to accept another person's cheques, a couple of others think that might be a good idea. If this spreads, people are going to stop hoarding your cheques and they will come flying home to the bank. Since you don't have enough in the bank to cover all the cheques, very nasty stuff is going to hit the fan!
But you are big, tough and very aggressive. You don't scare the other guy who can write cheques, he's pretty big too, but given a 'legitimate' excuse, you can beat the tripes out of the lone gas seller and scare him and his mates into submission.
And that, in a nutshell, is what the USA is doing right now with Iraq.
</snippet>

The Corinthian

Articles mooting this issue have been circulating since before this crisis began. I read a similar piece in La Republica recently (can't can’t the URL at present, not that it would matter as it's in Italian), which was well researched.

I'm not a recognised economist, or even a practicing one, but I was formally educated as an economist, for my sins. I would have to admit that there is truth in the Euro vs. Dollar theory, even if it has been padded with a degree of sensationalism and FUD.

To say that it is the reason for the current US invasion of Iraq would be an oversimplification. But to dismiss it out of hand is foolish - to begin with, the elimination of exchange uncertainty is a huge advantage in trade, and then this is even before we consider the monetary influence that would come from the demand in the US dollar. There has already been a degree of friction between Germany and the US in Kosovo over this issue as they compete in the region to establish a dominant currency of trade.

Certainly it should be noted that the two nations most vehemently opposing the present conflict would be those with the most to gain from the Euros ascendancy to currency of international trade as might, in many respects, the two nations most actively supporting it.

Dr_Teeth

http://www.ratical.org/ratville/CAH/RRiraqWar.html

This is the best write-up on the theory I've read so far, it was posted here a few weeks ago. But, as we were discussing the other day, there is still the problem of the UK's involvement - what's in it for them if the reason behind the war is to keep the dollar strong? That question needs to be answered.

Teeth.

simon_partridge

Originally posted by Dr_Teeth
This is the best write-up on the theory I've read so far, it was posted here a few weeks ago. But, as we were discussing the other day, there is still the problem of the UK's involvement - what's in it for them if the reason behind the war is to keep the dollar strong? That question needs to be answered.

The UK's involvement probably isn't related to this actual issue, it's more to do with Tony Blair's misguided notion that he has influence over George Bush, and an attempt to safeguard himself from the transatlantic wrath being vented at the French.

However, the whole episode has probably made British euro entry a much more remote probability now, and you could even end up seeing the UK fleeing the EU and joining the NAFTA organisation, thus becoming part of the blank cheque bloc themselves.

daveirl

This post has been deleted.

davej

If Tony Blair got the uk to join the euro, wouldn't it be a very agreeable way to "mend" some of those political bridges that have been damaged between them and France/Germany ?

However hopes for a referendum this summer seem to be remote. Neil Kinnock believes it is 2 or even 3 years away.

davej

bonkey

Originally posted by Dr_Teeth
what's in it for them if the reason behind the war is to keep the dollar strong?

A weak dollar will have a weakening effect on Sterling.
A vastly stronger Euro would have a weakening effect on Sterling.
Too much weakness is not a good thing.

I still dont see why this is a mystery - if Sterling was not amalgamated in the Euro before any such events occurred, then Sterling would get smashed from all sides - not a good prospect for Tony....regardless of whether or not he intends joining the Euro at a later stage.

jc

Sand

It would be a bit foolish to defend the dollar by going to war with Iraq, inflaming world and particularly arab opinion against the US - if anything it could be come a politically wise move for some of the ruling elites to distance themselves from the US by dropping the dollar in favour of the euro precisely because of the war?

Éomer of Rohan

Iraq has the second largest reserves of oil in the world - since it will be a pro US government installed, they will not dump their dollar stocks and thus the others would not - it would be a little risky and might backfire.

bonkey

Originally posted by Sand
It would be a bit foolish to defend the dollar by going to war with Iraq, inflaming world and particularly arab opinion against the US - if anything it could be come a politically wise move for some of the ruling elites to distance themselves from the US by dropping the dollar in favour of the euro precisely because of the war?

I guess that would depend on how much you believe the US will actually get it right or wrong....what the outcome would be. My guess is that Blair believes in the successful outcome....just like the US surely must also.

jc