The Euro Effect

[Joseph27]

There have been so many theories raised as to US involvement in the Middle East most especially in relation to the invasion of Iraq.  It was Oil, Oil, Oil, it was for strategic positioning in the region, it was to get rid of WMD, it was to free the Iraqi people from the a fundamentally bad regime.  The first of these reasons are usually donned by the critics, the latter by those more patriotic folk.  A more tangible explanation may be that war with Iraq became inevitable when Suddam  “converted his $10 billion reserve fund at the U.N. to euros”.  The move signalled an inherent danger to the US – yes you guessed it, “the core driver for toppling Saddam is actually the euro currency”.

Of course the major News providers in the US wouldn’t talk openly of this possibility, however be that as it may, the war came down to geo-strategic positing “and the overarching macroeconomic threats to the U.S. dollar from the euro”.  The US cannot afford the Euro gaining any momentum against the dollar in being used as an oil transaction currency standard.  US power was strong but not sufficient to control this market from afar, the US needed Iraq and most especially its oil.  

The ramifications of a shift towards a euro dollar standard cannot be overstated, and Bush and his team were willing to trade the good will America had built over decades, and any post Sep 11 sympathy to protect against this.  Iraq will now revert back to the dollar standard and the US will press hard to stop Iran “who is actively discussing a switch to euros for its oil exports”.   An added bonus to the US is that they get to keep Saudi Arabia on a leash.  In the bigger picture, the Iran and Saudi issues are “peripheral and of marginal consequence to this administration” – the short term economic backlash can be justified to starve off the longer term dollar crash of an OPEC transaction standard.  “All of this fits into the broader Great Game that encompasses Russia, India, China."

Back to the economics, “the effect of an OPEC switch to the euro would be that oil-consuming nations would have to flush dollars out of their (central bank) reserve funds and replace these with euros. The dollar would crash anywhere from 20-40% in value and the consequences would be those one could expect from any currency collapse and massive inflation (think Argentina currency crisis, for example). You'd have foreign funds stream out of the U.S. stock markets and dollar denominated assets, there'd surely be a run on the banks much like the 1930s, the current account deficit would become unserviceable, the budget deficit would go into default, and so on. Your basic 3rd world economic crisis scenario”.

The US doesn’t have an exit strategy in Iraq for a reason, they need to stay there as they can ill afford to let OPEC switch. That being said, Iran looks likely to start receiving payment for crude in Euros instead of dollars.  Sources in Iran say it “is based primarily on economics”, though regardless of whether the Iranian government is hitting back at being grouped in the Axis of Evil, the end result of a switch would be counter to US interests.  War on Iran? It is not too far fetched a scenario though it would be harder to justify than last months escapade.  The currency switch proposal is currently being reviewed by the Central Bank if Iran, if it is ratified it will have endorsement of a democratically elected parliament.  Already the majority of reserve funds in the central bank have been shifted  

One of the USA’s strongest foreign policy tools has been the strength of its currency, a position that allows it to monopolise international trade.  A stronger Euro would negate this and may allow for a more level playing field.  A move by OPEC would more than hurt the USD, the Euro would emerge significantly stronger.  They may even have to face the possibility of not making so many four wheel drives with 5 litre engines that gulp down very cheap fuel.

“"The Federal Reserve's greatest nightmare is that OPEC will switch its international transactions from a dollar standard to a euro standard. Iraq actually made this switch in Nov. 2000 (when the euro was worth around 80 cents), and has actually made off like a bandit considering the dollar's steady depreciation against the euro. (Note: the dollar declined 17% against the euro in 2002.) “
*****************************
The quotes I have taken were from an article entitled "The Real Reason for the War in Iraq" by W. Clark.  

[Imagine]

It is offcourse clear that USA's no 1 export product is the US Dollar.

A takeover by the Euro would seriously damage the US economy.
We'll see.

[Joseph27]

The US is now talking a little more on Iran's nuclear program.  Give it 6 months and Iran will be dealt with more hashly in the American press.  If they do decide to accept only euros for oil you can bet the dye will be cast for war.  

[This message has been edited by Joseph27 (edited 10-05-2003).]

[Joseph27]

Is this topic totally out there and not worthy of any discussion or is it too tricky to handle?  

Phil have you read or heard these arguments?

[PhilM]

Joseph 27 in fact I have commented on this before; but I will answer your question.

Under Bush the USA trade deficit totaled US$435 billion in 2002 and is currently running at over US$40 billion per month. This means the U.S. needs almost $1.4 billion a day in foreign capital investment to sustain the dollar's value. At the same time the twelve nations using the euro have trade surpluses and are drawing in foreign investment needed by the US.

Against this background the greenback has drooped in value against the euro by 12% since the beginning of this year. A weaker US dollar should in theory be good for US exporters as it makes their goods cheaper abroad but imported goods more expensive. Economists hoped in this scenario US citizens would buy more goods made in the USA whilst the world market would also purchase far more US manufactured goods. In reality this has not occurred as most major economies are suffering around the world and the sheer level of consumer spending has dropped drastically thus cutting US exports.

Oil has traditionally been one of the great support mechanisms of the US dollar. As long as all oil sales and purchases are carried out in US dollars every oil importing or exporting country has to trade in US dollars thus helping to shore the dollar up. This means the US economy is like a three-legged stool with Oil, Foreign Investment, and Exports propping it up. Bush’s total negligence of the US economy coupled to his tax cuts for the rich have confounded the economists and resulted in the US loosing out making all three legs shaky!

More countries now see added value in both investing in and dealing in the Euro with the result that foreign investment in the USA is falling fast and some countries are divesting themselves of US holdings and taking their capital abroad. Without the foreign investment the US economic model becomes unsustainable. At the same time countries are starting to ask why they should buy and sell oil in US dollars when the currency is in decline and the Euro is in the ascendancy. So exports are down, foreign investment is down, and already some are trading oil in Euros, Bush’s economy is in the doldrums

From what I have read it is very clear that if even half of the current buyers and sellers of oil switched to using the Euro instead of the US$ the greenback would loose its position as the world’s dominant currency. As this happened investments by foreigners in the US would dry up, more and more overseas owners would sell their US property and divest themselves of their investments. They would take the US dollars realised out of the US and invest them in Europe or the Asia Pacific Region. Importers and Exporters of other goods would also start to demand to be paid in Euros which would hurt the US economy even further. The American dream would rapidly take a nosedive.

The US Government is well aware of the scenario I have tried to lay out and that is why they will currently use any means fair or foul to try to stop it from becoming a reality. In reality I feel the situation will continue to worsen for the USA until they see the light and throw Bush plus his cronies out. Please take note in writing this I write as a Businessman not an Economist; however if I have made errors in my summary I am sure others better versed in International finances can post correcting me.

[Joseph27]

I remember you writing such a thing before, now come to think of it.  The danger is very real for the US economy but is it enough of a reason to engage in hostilities?  

[Manc Man]

Again, you gotta laugh.

Remember my list where lefties claim to have discovered "The One Big Reason" that they are so clever to have identified and now they will explain it to the rest of us. Because they are so clever.

This is the perfect template conspiracy theory. You know how you test? Take it into a word processor and replace a few words.

Use the replace function and replace

Dollar with Baseball Cap
Euro with Turban
Currency with Headgear
Transaction with Standard

and I swear it makes just as much sense.

You can do the same with Cars/Camels, Hot Dogs/Kous Kous, anything you want and it all makes the same eery sounding sort of sense.

There have been so many theories raised as to US involvement in the Middle East most especially in relation to the invasion of Iraq. It was Oil, Oil, Oil, it was for strategic positioning in the region, it was to get rid of WMD, it was to free the Iraqi people from the a fundamentally bad regime. The first of these reasons are usually donned by the critics, the latter by those more patriotic folk. A more tangible explanation may be that war with Iraq became inevitable when Suddam “converted his 10 billion base ball hats currentlyat the U.N. to turbans”. The move signalled an inherent danger to the US – yes you guessed it, “the core driver for toppling Saddam is actually the turban”.
Of course the major News providers in the US wouldn’t talk openly of this possibility, however be that as it may, the war came down to geo-strategic positing “and the overarching macroeconomic threats to the U.S. baseball cap from the turban”. The US cannot afford the Turban gaining any momentum against the baseball cap in being used as an international head gear standard. US power was strong but not sufficient to control this market from afar, the US needed Iraq and most especially its turban factories.
The ramifications of a shift towards a turban standard cannot be overstated, and Bush and his team were willing to trade the good will America had built over decades, and any post Sep 11 sympathy to protect against this. Iraq will now revert back to the baseball cap and the US will press hard to stop Iran “who is actively discussing a switch to turbans”. An added bonus to the US is that they get to keep Saudi Arabia on a leash. In the bigger picture, the Iran and Saudi issues are “peripheral and of marginal consequence to this administration” – the short term economic backlash can be justified to starve off the longer term baseball cap crash of an OPEC headgear standard. “All of this fits into the broader Great Game that encompasses Russia, India, China."
Back to the economics, “the effect of an OPEC switch to the turban would be that oil-consuming nations would have to flush baseball caps out of their central headgear reserves and replace these with turbans. The baseball cap would crash anywhere from 20-40% in value and the consequences would be those one could expect from any headgear collapse and massive inflation (think Argentina currency crisis, for example). You'd have foreign funds stream out of the U.S. stock markets and baseball cap related assets, there'd surely be a run on the banks much like the 1930s, the current account deficit would become unserviceable, the budget deficit would go into default, and so on. Your basic 3rd world economic crisis scenario”.
The US doesn’t have an exit strategy in Iraq for a reason, they need to stay there as they can ill afford to let OPEC switch. That being said, Iran looks likely to start standardizing on Turbans instead of baseball caps. Sources in Iran say it “is based primarily on economics”, though regardless of whether the Iranian government is hitting back at being grouped in the Axis of Evil, the end result of a switch would be counter to US interests. War on Iran? It is not too far fetched a scenario though it would be harder to justify than last months escapade. The headgear switch proposal is currently being reviewed by the Central Bank if Iran, if it is ratified it will have endorsement of a democratically elected parliament. Already the majority of reserve funds in the central bank have been shifted
One of the USA’s strongest foreign policy tools has been the strength of its headgear, a position that allows it to monopolise international trade. A stronger Turban would negate this and may allow for a more level playing field. A move by OPEC would more than hurt the baseball cap, the Turban would emerge significantly stronger. They may even have to face the possibility of not making so many four wheel drives with 5 litre engines that gulp down very cheap fuel.
“"The Federal Reserve's greatest nightmare is that OPEC will switch its international standards from a baseball cap standard to a turban standard. Iraq actually made this switch in Nov. 2000 (when the turban was worth around 80 cents), and has actually made off like a bandit considering the baseball cap's steady depreciation against the turban. (Note: the baseball cap declined 17% against the turban in 2002.) “

Headgear, the unspoken secret behind Gulf War II. Discuss cleverly.

mm

[PhilM]

Current exchange rate on the hatters market is ten baseball caps for one turban so now you really have stuffed the US economy.

Forget about your baseball caps and turbans we Brits are sticking to our good old Bowler hat sterling thank you. That buys more baseball caps than it used to.

P.S. mm - I behaved and did not mention war once in my previous post, trust a right wing scoundrel to bring it back to war!  

[Manc Man]

10 baseball caps to 1 turban?

No wonder they call hatters mad.

Enjoy your bowler while you can,  if Blair has his way and prevails over Brown you'll all be sporting bog standard Euro-berets soon.

Should look good with the duffle coat.

mm

[This message has been edited by Manc Man (edited 12-05-2003).]

[WolfgangHolzem]

I really love it with the Euro.

Currently based in Thailand but get paid about 40% commissions in Euros from European companies.

Last year it was just 10%. I am happy and looking forward for an even stronger Euro. (1.20 ~ 1.40 would be a dream again the Dollar but the export companies from Europe may face a problem in high rates).

Now Malaysia is shifting soon a large number of US Dollars into Euros. (and they want to qoute all exports of LPG in Euros).

[funk]

Thank you for the posts Joseph and Mphil. it's something I never heard of, and which is most interesting.

I think that the world will slowly turn to the Euro anyway, since it is a much more common (considering the number of people who deal with it, and the GDP) currency than the US dollar. But of course if the transition can be made the smoothest possible it would be better. Do you think anything can be done to make the transition smooth?

[Imagine]

Maybe, before the rest of the world start turning to Euro's... the British should wake up and realize that they are part of Europe first.

[Joseph27]

I guess the thing for the Brits is that so many are still partial to the pound.  Ultimately the country may be better off adopting the Euro - regardless its a decision that they as a people must make.  

[PhilM]

Imagine – History (we have fought with or been allies with most European Countries at one time or other) and the English Channel, which runs between the United Kingdom and Europe are the basic reasons behind the insular island thinking of the British.

Coupled to this the European Union has largely been seen by the British as a means for other countries such as France to hand out ever increasing subsidies to their farmers to the detriment of Great Britain. We remain the third largest contributor to the EU budget as can be seen in the pie chart below. Through the rebate scheme many countries in Europe are beneficiaries of money from the EU budget, the United Kingdom has always remained a nett contributor.
http://europa.eu.int/comm/budget/pubfin/data/tabfinem_en.gif

Whilst I agree logic might seem to dictate the United Kingdom should join the Euro there is a fear amongst many businessmen in the UK the Euro is not achieving the effects which were promised. At the time of launch it was claimed the Euro would lead to lower consumer prices, more jobs, and growth in each participant countries economy. In reality the stability pact has caused lower growth, higher consumer prices, and rising unemployment amongst member nations.

Since the launch of the Euro whilst unemployment has increased in member nations it has gone down in the UK, plus the UK has seen the highest growth in trade and GDP of any European Nation. In addition 32% of UK business is denominated in Dollars and just 20% in Euros, the currency volatility between the Pound Sterling and the Dollar has been far less than that between the Euro and the Dollar. This means that UK exports have remained attractive to the USA whilst those denominated in the Euro become increasingly expensive.

So whilst logic says join the Euro the factual reality means Brown and Blair will have their work cut out to convince most British Businessmen of the benefits of giving up Sterling in favour of the Euro.

[funk]

Now I understand the reason for the opposition of the US (and its lapdog in Europe) for the Euro. Would the Euro replace the dollar even faster if the pound entered it?