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BUSINESS
Will the euro replace the dollar as the world currency?
By
Devajit Mahanta
After nearly a century of domination in world monetary affairs, the
dollar is about to face stiff competition when the euro is created. On 1st
January 1999, Europe was host to one of
the most important events in economic history. Eleven of the fifteen
European Union member states formed an Economic and Monetary Union (EMU)
and adopted the Euro as their single currency. This development will lead
to a fundamental transformation of today’s global economic landscape.
Despite the apparent swift U.S.
military success in Iraq
in March 2003, the U.S. dollar has yet to benefit as safe haven currency. A
hidden war between the dollar and the new Euro currency for global hegemony
is at the heart of this new phase. To understand the importance of this
unspoken battle for currency hegemony, we first must understand that US hegemony
has rested on two unchallengeable pillars. First, the overwhelming US military
superiority over all other rivals. The US today spends on defence more
than three times the total for the entire European Union, some $ 396
billion versus $118 billion last year. The second pillar of American
dominance in the world is the dominant role of the U.S. dollar as reserve
currency. The Petrodollar has been at the heart of the dollar hegemony
since the 1970’s. As long as the dollar remains the dominant currency,
especially in oil trade, it is difficult to see how the U.S. can be
dislodged from its position as the world’s dominant economic power.
In October 2000, a UN panel approved an Iraqi request to receive oil-export
payments in Euros rather than the US dollar, which has been the norm for
oil transactions for decades. Iraq’s
effort to defy the “petrodollar” standard prompted a number of analysts to
conclude that the invasion of Iraq was not an oil war, but an
oil currency war. That’s why after the invasion of Iraq in March 2003, the US secured
oil areas first. The only government building in Baghdad not bombed was the Oil Ministry.
The war in Iraq
may be a war for oil, but at a deeper level it is a war for the defence of
the continued control of the world oil economy through the dollar. During a
speech in Spain in April 2003, Javad Yarjani, chief Petroleum Market
Analyst for the Organization for Petroleum Exporting Countries (OPEC), said
that “OPEC will not discount entirely the possibility of adopting Euro
pricing and payments in future.” Many of the Muslim countries of South East Asia have already begun looking to the
Euro as an alternative to the dollar for national foreign-exchange
reserves. The Governor of Indonesia’s central bank announced that the
country would consider using Euros for its foreign exchange reserves, a
process Iran
began in 1999. The Reserve Bank of India in its 1997-98 annual
report has warned that Indian corporate should be ready to pay or invoice
in euro as they may encounter customers and suppliers in the European Union
who are willing to deal only in the euro. Hence, in this new world of
international monetary structure US needs to be very careful about its
economic policies. However, in examining the US economy in the recent past
we realize that the trouble has already begun for e.g. the current account
deficit jumped by about $100 billion annually during the three-year period
1998-2000, nearing $450 billion or about 4.5 percent of GDP in 2000. Hence,
in conclusion we can safely say that Euro does indeed pose a significant
threat to the US dollar. For now, only one thing is clear; the Euro has
arrived.
Readers can send their feedback at devajitmahanta@gmail.com
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