nolympics writes
"A Note on the "Euro" Explanation of the War


by
George Caffentzis

The relationship between the euro, the dollar and (in distant third, the
yen) is an important issue for understanding the dynamics of world
capitalism, but it clearly cannot be used in a one-step explanation of the
US/Iraq war.

One reason for my hesitance is this. If the story was simply the euro's
hegemony over the dollar, then why are two of the most important euro-using
and holding states in Europe, Spain and Italy, supporting the US/UK position
on the war? If the euro's potential hegemony was so important a matter, then
the capitalists of Italy and Spain would be all over their governments to
support the French, German and, yes, Russian position (and, of course, the
last is not a euro user). But they clearly are not...at least not yet. On the
contrary, it is the Spanish and Italian proletariats that have spoken
forcefully, not their bosses; for if the latter had, then I assure you the
votes at the UN and the signatures on the infamous Wall Street Journal letter
would have been quite different.

My second reason is related to currencies. The decision to use a foreign
currency for reserve purposes is, of course, very important for any Central
Banker (including those of the OPEC nations). And there are a number of
criteria that a currency must pass muster on in order to be so used. Two of
the most important are security and exchangeability.
People who support the "euro explanation of the war" speak of the euro as
evidently on par with the US dollar, but this is not the case. The euro,
unlike the old German mark, is a multinational currency and can easily vanish
from existence, if a few of the nations in the monetary union decide to take
radically different economic paths due, for example, to an economic crisis or
a national emergency. Indeed, many in the financial world believe that this
will be the case with the euro within the next few years (indeed, the Iraq
crisis might be the beginning of such a development). That means that the
security of the euro is evidently below that of the dollar.

Second is exchangeability. Surely there have been a variety of ups and
downs in the value of the dollar with respect to notable foreign currencies,
especially the yen and the mark, over the last thirty years even more
remarkable than the sudden recent strength of the euro versus the dollar. The
reason for these changes has been ultimately related to the profit (and
shadow interest) rates in the different national economies. For remember that
currencies are not only used to buy goods (e.g., oil) but to buy capital and
money and the financial exchange and equity markets outweigh the commodity
market many times in value.

If a national capital has a high profit rate, then it is attractive to
buy its currency; if not, its currency is unattractive, even if it produces
important and pleasant commodities. The old Ricardian myth of the exchange of
Port wines and textiles determining financial balances is a thing of the
past.

In other words, what is the major object of desire on the international
market is the capacity to exploit at an attractive rate for world-shopping
capitalists. The US has had a relatively better profit record than the
Europeans since the collapse of the various European "miracles" in the 1970s.
That has been an important basis of the interest in US dollars.

The problem for the US is that--since 1997--the ratio of the US profit
rate and the average European profit rate is not as unfavorable against the
Europeans as it used to be. This is reflected by the current US interest rate
which is hovering just above zero. European currencies are now relatively
more attractive, hence the relative appreciation of the euro over the last
few years.

The problem for the Europeans, however, is that their profit rate is very
low as well and is not likely to be increasing in the near future.
Hence, the reasonable OPEC capitalist might be interested in a monetary
portfolio that would balance the insecurity of the euro and the lack-luster
profitability of its member nations' capitalist firms, with the increasing
problems that the dollar is posing for them. The most important of these
problems , however, is the security of the US dollars invested and banked in
the US. Up until recently there was no threat to capital invested in the US
by the petrocrats of the Middle East, but now there is widespread fear that
funds will be frozen as part of the "war on terror." This anxiety could
definitely be a serious problem for the US government, economy and dollar.
Since it could make other currencies more attractive from the point of view
of security, even if they do not provide a high-profit environoment. I have not
seen the statistics on this yet, but I wouldn't be surprised that they will
tell us one of the reasons for the recent revival of the euro, which, by the
way, is still below its initial dollar value (in 2000) of $1.17.

If we balance all these considerations and recognize that the choice of a
reserve currency is not based upon a voluntaristic desire to cut your nose to
spite your face, then it is hardly likely that the US is going to war to stop
oil exporting nations from dumping the dollar. Indeed, if the financial drain
of war and occupation stimulates a recession in the US (that France and
Germany escape) and intensifies confiscation of oil-related funds in the US
(without a parallel confiscation regime in France and Germany), then the war
might increase the move to the euro"