The Euro Effect - Part 2
By W. Clark
As for the events currently taking place in Venezuela, items #2 and #7 mentioned in the previous installment of this essay may allude to why the Bush administration quickly endorsed the failed military-led coup of Hugo Chavez in April 2002. Although the coup collapsed after 2 days, various reports suggest the CIA and a rather embarrassed Bush administration approved and may have been actively involved with the civilian/military coup plotters.
"George W. Bush's administration was the failed coup's primary loser, underscoring its bankrupt hemispheric policy. Now it is slowly filtering out that in recent months White House officials met with key coup figures, including Carmona. Although the administration insists that it explicitly objected to any extra-constitutional action to remove Chavez, comments by senior U.S. officials did little to convey this. . . .
"The CIA's role in a 1971 Chilean strike could have served as the working model for generating economic and social instability in order to topple Chavez. In the truckers' strike of that year, the agency secretly orchestrated and financed the artificial prolongation of a contrived work stoppage in order to economically asphyxiate the leftist Salvador Allende government.
"This scenario would have had CIA operatives acting in liaison with the Venezuelan military, as well as with opposition business and labor leaders, to convert a relatively minor afternoon-long work stoppage by senior management into a nearly successful coup de grâce." 
Interestingly, according to an article by Michael Ruppert, Venezuelan's ambassador Francisco Mieres-Lopez apparently floated the idea of switching to the euro as their oil currency standard approximately one year before the failed coup attempt.
Furthermore, there is evidence that the CIA is still active in its attempts to overthrow the democratically elected Chavez administration. In fact, this past December a Uruguayan government official exposed the ongoing covert CIA operations in Venezuela:
"Uruguayan EP-FA congressman Jose Nayardi says he has information that far-reaching plan have been put into place by the CIA and other North American intelligence agencies to overthrow Venezuelan President Hugo Chavez Frias within the next 72 hours. . . .
Nayardi says he has received copies of top-secret communications between the Bush administration in Washington and the government of Uruguay requesting the latter's cooperation to support white collar executives and trade union activists to 'break down levels of intransigence within the Chavez Frias administration.'" 
Venezuela is the fourth largest producer of oil, and the corporate elites whose political power runs unfettered in the Bush/Cheney oligarchy appear interested in privatizing Venezuela's oil industry. Furthermore, the establishment might be concerned that Chavez's 'barter deals' with 12 Latin American countries and Cuba are effectively cutting the U.S. dollar out of the vital oil transaction currency cycle. Commodities are being traded among these countries in exchange for Venezuela's oil, thereby reducing reliance on fiat dollars. If these unique oil transactions proliferate, they could create more devaluation pressure on the dollar. Continuing attempts by the CIA to remove Hugo Chavez appear likely.
The U.S. economy has acquired significant structural imbalances, including our record-high trade account deficit (now almost 5% of GDP), a $6.3 trillion dollar deficit (60% of GDP), and the recent return to annual budget deficits in the hundreds of billions. These are factors that would devalue the currency of any nation under the 'old rules.' Why is the dollar still predominant despite these structural flaws? The elites understand that the strength of the dollar does not merely rest on our economic output per se. The dollar posses two unique advantages relative to all other hard currencies.
The reality is that the strength of the dollar since 1945 rests on its being the international reserve currency. Thus it assumes the role of fiat currency for global oil transactions (ie. 'petro-dollar'). The U.S. prints hundreds of billions of these fiat petro-dollars, which are then used by nation states to purchase oil/energy from OPEC producers (except Iraq, to some degree Venezuela, and perhaps Iran in the near future). These petro-dollars are then re-cycled from OPEC back into the U.S. via Treasury Bills or other dollar-denominated assets such as U.S. stocks, real estate, etc.
The 'old rules' for valuation of our currency and economic power were based on our flexible market, free flow of trade goods, high per worker productivity, manufacturing output/trade surpluses, government oversight of accounting methodologies (ie. SEC), developed infrastructure, education system, and of course total cash flow and profitability.
While many of these factors remain present, over the last two decades we have diluted some of these 'safe harbor' fundamentals. Despite vast imbalances and structural problems that are escalating within the U.S. economy, the dollar as the fiat oil currency created 'new rules'.
The following excerpts from an Asia Times article discusses the virtues of our fiat oil currency and dollar hegemony (or vices from the perspective of developing nations, whose debt is denominated in dollars).
"Ever since 1971, when US president Richard Nixon took the dollar off the gold standard (at $35 per ounce) that had been agreed to at the Bretton Woods Conference at the end of World War II, the dollar has been a global monetary instrument that the United States, and only the United States, can produce by fiat. The dollar, now a fiat currency, is at a 16-year trade-weighted high despite record US current-account deficits and the status of the US as the leading debtor nation. The US national debt as of April 4 was $6.021 trillion against a gross domestic product (GDP) of $9 trillion.
"World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The world's interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies. To prevent speculative and manipulative attacks on their currencies, the world's central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. This creates a built-in support for a strong dollar that in turn forces the world's central banks to acquire and hold more dollar reserves, making it stronger. This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973.
"By definition, dollar reserves must be invested in US assets, creating a capital-accounts surplus for the US economy. Even after a year of sharp correction, US stock valuation is still at a 25-year high and trading at a 56 percent premium compared with emerging markets.
". . . The US capital-account surplus in turn finances the US trade deficit. Moreover, any asset, regardless of location, that is denominated in dollars is a US asset in essence. When oil is denominated in dollars through US state action and the dollar is a fiat currency, the US essentially owns the world's oil for free. And the more the US prints greenbacks, the higher the price of US assets will rise. Thus a strong-dollar policy gives the US a double win." 
This unique geo-political agreement with Saudi Arabia in 1973 has worked to our favor for the past 30 years, as this arrangement has raised the entire asset value of all dollar denominated assets/properties, and allowed the Federal Reserve to create a truly massive debt and credit expansion (or 'credit bubble' in the view of some economists). These structural imbalances in the U.S. economy are sustainable as long as:
1. Nations continue to demand and purchase oil for their energy/survival needs, and
2. The fiat reserve currency for global oil transactions remain the U.S. dollar (and dollar only).
These underlying factors, along with the 'safe harbor' reputation of U.S. investments afforded by the dollar's reserve currency status propelled the U.S. to economic and military hegemony in the post-World War II period. However, the introduction of the euro is a significant new factor, and appears to be the primary threat to U.S. economic hegemony. Moreover, in December 2002 ten additional countries were approved for full membership into the E.U. In 2004 this will result in an aggregate GDP of $9.6 trillion and 450 million people, directly competing with the U.S. economy ($10.5 trillion GDP, 280 million people).
Especially interesting is a speech given by Mr Javad Yarjani, the Head of OPEC's Petroleum Market Analysis Department, in a visit to Spain in April 2002. His speech dealt entirely with the subject of OPEC oil transaction currency standard with respect to both the dollar and the euro. The following excerpts from this OPEC executive provide insights into the conditions that would create momentum for an OPEC currency switch to the euro. Indeed, his candid analysis warrants careful consideration given that two of the requisite variables he outlines for the switch have taken place since this speech in Spring 2002. These vital stories are discussed in the European media, but have been censored by our own mass media.
". . . The question that comes to mind is whether the euro will establish itself in world financial markets, thus challenging the supremacy of the US dollar, and consequently trigger a change in the dollar's dominance in oil markets. As we all know, the mighty dollar has reigned supreme since 1945, and in the last few years has even gained more ground with the economic dominance of the United States, a situation that may not change in the near future. By the late 90s, more than four-fifths of all foreign exchange transactions, and half of all world exports, were denominated in dollars. In addition, the US currency accounts for about two thirds of all official exchange reserves. The world's dependency on US dollars to pay for trade has seen countries bound to dollar reserves, which are disproportionably higher than America's share in global output. The share of the dollar in the denomination of world trade is also much higher than the share of the US in world trade.
"Having said that, it is worthwhile to note that in the long run the euro is not at such a disadvantage versus the dollar when one compares the relative sizes of the economies involved, especially given the EU enlargement plans. Moreover, the Euro-zone has a bigger share of global trade than the US and while the US has a huge current account deficit, the euro area has a more, or balanced, external accounts position. One of the more compelling arguments for keeping oil pricing and payments in dollars has been that the US remains a large importer of oil, despite being a substantial crude producer itself. However, looking at the statistics of crude oil exports, one notes that the Euro-zone is an even larger importer of oil and petroleum products than the US. . . .
". . . From the EU's point of view, it is clear that Europe would prefer to see payments for oil shift from the dollar to the euro, which effectively removed the currency risk. It would also increase demand for the euro and thus help raise its value. Moreover, since oil is such an important commodity in global trade, in term of value, if pricing were to shift to the euro, it could provide a boost to the global acceptability of the single currency. There is also very strong trade links between OPEC Member Countries (MCs) and the Euro-zone, with more than 45 percent of total merchandise imports of OPEC MCs coming from the countries of the Euro-zone, while OPEC MCs are main suppliers of oil and crude oil products to Europe. . . .
"Of major importance to the ultimate success of the euro, in terms of the oil pricing, will be if Europe's two major oil producers -- the United Kingdom and Norway join the single currency. Naturally, the future integration of these two countries into the Euro-zone and Europe will be important considering they are the region's two major oil producers in the North Sea, which is home to the international crude oil benchmark, Brent. This might create a momentum to shift the oil pricing system to euros. . . . "In the short-term, OPEC MCs, with possibly a few exceptions, are expected to continue to accept payment in dollars. Nevertheless, I believe that OPEC will not discount entirely the possibility of adopting euro pricing and payments in the future. The Organization, like many other financial houses at present, is also assessing how the euro will settle into its life as a new currency. The critical question for market players is the overall value and stability of the euro, and whether other countries within the Union will adopt the single currency.
". . . Should the euro challenge the dollar in strength, which essentially could include it in the denomination of the oil bill, it could be that a system may emerge which benefits more countries in the long-term. Perhaps with increased European integration and a strong European economy, this may become a reality. Time may be on your side. I wish the euro every success." 
Based on this important speech, momentum for OPEC to consider switching to the euro will grow once the E.U. expands in May 2004 to 450 million people with the inclusion of 10 additional member states. The aggregate GDP will increase from $7 trillion to $9.6 trillion. This enlarged European Union (EU) will be an oil consuming purchasing population 33% larger than the U.S., and over half of OPEC crude oil will be sold to the EU as of mid-2004. This does not include other potential E.U./euro entrants such as the U.K., Norway, Denmark and Sweden. It should be noted that since late 2002, the euro has been trading at parity or above the dollar, and analysts predict the dollar will continue its downward trending in 2003 relative to the euro.
It appears the final two pivotal items that would create the OPEC transition to euros will be based on (1) if and when Norway's Brent crude is re-dominated in euros and (2) when the U.K. adopts the euro. Regarding the later, Tony Blair is lobbying heavily for the U.K. to adopt the euro, and their adoption would seem imminent within this decade. If and when the U.K. adopts the euro currency I suspect a concerted effort will be quickly mounted to establish the euro as an international reserve currency. Again, I offer the following information from my astute acquaintance who analyzes these monetary matters very carefully:
"The pivotal vote will probably be Sweden, where approval this next autumn of adopting the euro also would give momentum to the Danish government's strong desire to follow suit. Polls in Denmark now indicate that the euro would pass with a comfortable margin and Norwegian polls show a growing majority in favor of EU membership. Indeed, with Norway having already integrated most EU economic directives through the EEA partnership and with their strongly appreciated currency, their accession to the euro would not only be effortless, but of great economic benefit.
"As go the Swedes, so probably will go the Danes and Norwegians. It's the British who are the real obstacle to building momentum for the euro as international transaction and reserve currency. So long as the United Kingdom remains apart from the euro, reducing exchange rate costs between the euro and the British pound remains their obvious priority. British adoption (a near-given in the long run) would mount significant pressure toward repegging the Brent crude benchmark -- which is traded on the International Petroleum Exchange in London -- and the Norwegians would certainly have no objection whatsoever that I can think of, whether or not they join the European Union.
"Finally, the maneuvers toward reducing the global dominance of the dollar are already well underway and have only reason to accelerate so far as I can see. An OPEC pricing shift would seem rather unlikely prior 2004 -- barring political motivations (ie. from anxious OPEC members) or a disorderly collapse of the dollar (ie. Japanese bank collapse due to high oil prices following a prolonged Iraq conflict) but appears quite viable to take place before the end of the decade."
In other words, around 2005, from a purely economic and monetary perspective, it will be logical for OPEC to switch to the euro for oil pricing. Of course that will devalue the dollar, and hurt the US economy unless it begins making some structural changes -- or use its massive military power to force events upon OPEC . . . Facing these potentialities, I hypothesize that President Bush intends to topple Saddam in 2003 in a pre-emptive attempt to initiate massive Iraqi oil production in far excess of OPEC quotas, to reduce global oil prices, and thereby dismantle OPEC's price controls. The end-goal of the neo-conservatives is incredibly bold yet simple in purpose, to use the 'war on terror'as the premise to finally dissolve OPEC's decision-making process, thus ultimately preventing the cartel's inevitable switch to pricing oil in euros.
Continued Next Week... Oil and American-occupied Iraq
blog comments powered by Disqus