Magazine article The Spectator

What's That in Euros?

Magazine article The Spectator

What's That in Euros?

Article excerpt

It has always been hard to imagine what the problem must be to which the answer is the euro. For most of the past three years, the idea that the single currency might one day emerge as a genuine alternative to the dollar as a global reserve currency has been laughable. Instead, the euro has looked like the thing eurosceptics always maintained it was: a reckless monetary experiment that stands for the word of no government, that relies on the good faith of no country, that cannot even police its own stability pact, and that deservedly saw its value plummet in the foreign exchange markets.

But if the idea that the euro could become a rival to the dollar was a joke, then the joke may be on us. In the past 18 months, the euro has risen more than 30 per cent against the dollar. The dollar was already buckling under the strain of America's giant trade and budget deficits. Now, following the Iraq war, politics has entered the equation. Suddenly euro-zone policymakers sense the opportunity to realise their ambitions to create a rival to the dollar. We should all be worried. Their efforts to promote the euro could trigger currency wars which will leave the whole world worse off.

The lengths to which the eurozone will go to supplant the dollar can be seen in reports, last week, that Russia is considering selling its oil in euros rather than dollars. On the face of it, this seems perfectly rational: Russia sells most of its oil to Europe, so such a move would save on currency conversion. But in reality, talk of pricing oil in euros is pure politics, says Yevgeny Gavrilenkov, a former adviser to President Putin and managing director of Troika Dialog, a Russian investment bank. 'There is minimal economic benefit to either Russia or the eurozone to be gained from such a move.'

The idea came from France and Germany and its aim is to undermine the dollar. The fact that oil and other commodities are priced in dollars underpins America's role as a global reserve currency and by extension its economic supremacy. Other countries arc obliged to buy dollars to trade. This gives America the freedom to keep printing dollars without sparking inflation, enabling it to fund wars, giant trade deficits, government-spending programmes and tax cuts. If the EU could persuade oil producers to price oil in euros, it would be a hugely symbolic victory for the single currency.

The euro-plotters hope that if Russia, the world's second largest oil producer, starts pricing its oil in euros, other countries will follow suit. Indeed, Iraq made the switch in November 2000, in a show of defiance that some conspiracy theorists say sealed the fate of the Saddam regime. Iran, another member of the 'axis of evil', has been openly considering making the switch since 1999. Venezuela is already selling part of its oil under a barter system, thus avoiding using any currency. And last year, a senior Opec official made a speech speculating that it could make economic sense for the oil producers' cartel to price its oil in euros in the future.

Of course, Opec has considered such switches before. 'Every time the dollar goes through a rough patch, you get this talk,' says Roger Diwan of consultancy group PFC Energy. 'It happens about once every three years.' However, until now, Saudi Arabia has always blocked any such move. But now even the Saudis are wavering.

Last year, a former US ambassador to Saudi Arabia told a committee of the US Congress: 'One of the major things the Saudis have historically done, in part out of friendship with the US, is to insist that oil continues to be priced in dollars. Therefore the US Treasury can print money and buy oil, which is an advantage no other country has. With the emergence of other currencies and with strains in the relationship, I wonder whether there will not be again, as there has been in the past, people in Saudi Arabia who raise the question of why they should be so kind to the United States.'

If the oil producers turn their backs on the US dollar, the ramifications for the global economy would be immense. …

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