Euro < Dollar

ÁÎ×Ó¹â HenryC.K.Liu ¹ù¤l¥ú hliu at
Sat Jan 29 08:54:07 MST 2000

There were periodic reports in the Dutch press that the Dutch Central
Bank suspected that treasuries of companies borrowed euro, change them
for dollars and buy dollar-bonds, to profit from the difference in
interest rates and the fall of the euro, and that this 'euro carry
contributed to the fall of the euro. One calculation showed that gains
for such operations would have been 12% (interest difference plus fall
euro exchange rate) during the first 5 months of 1999. Also, the Wall
Street Journal Europein late May 1999 mentioned this as an explanation
in an editorial.

The AP reported:
The euro slipped even further against the dollar Monday June 7, 1999 as
hopes receded for peace in Kosovo. The dollar fell against the yen.

When the ECB was formed, the Germans brought their fixation against
inflation with them.

With the rise of monetarism, the Fed, together with the Treasury
Department, have evolved from traditionally quiet functions of insuring
the long term value and credibility of the nations currency, to activist
promotions of economy boom, replacing the Keynesian economic role of the
Federal Budget.
Never before until Greenspan has any central banker advocated and
celebrated the institutionalization and socialization of risk as an
economic policy.
As Anthony Giddens, director of the London School of Economics, explains
in his The Third Way: "nothing is more dissolving of tradition than the
'permanent revolution' of market forces."

Helmut Kohl succeeded by peaceful means where Napoleon failed. In
ambition, the euro regime is historic. Never mind that for the first
three years of its life the infant euro will be a virtual currency, with
notes and coins only available from 2002 onwards.

>From day one, the ECB set a single interest rate for the entire
euro-zone and its 11 currencies became irrevocably fixed.
Members no longer have the option to alter borrowing costs or allow
their currencies to take the strain.

The introduction of the euro was highly significant, not for just the
developed capitalist economies, but the whole world.

The unique aspect of the euro is that for the first time in history, a
currency union has preceded a political union. This means that the
marxist view that economic structure of society determines its political
structure is now plain for all to see and not just perceivable only to
the intellectually and politically astute.
The transformation of political nationalism into sepranatioalism is a

Before going further, some facts on the euro would be useful remainders.
It began 4 decades ago when European leaders signed the Treaty of Rome
1957, which gave birth the EMU (Economic and Monetary Union).
The historical root went back to Napoleon's Continental System of 1805,
after the British defeated the French at Trafalgar.

The Maastricht Treaty in 1992 set up the euro and 5 conditions for
countries to join.
The 5 conditions are:
1) Inflation during the year before joining cannot exceed by more than
1.5 percentage points than the 3 best performing members.
2) Less than 3% GDP budget deficit
3) Sovereign debt less than 60% of GDP or trending down
4) Long term interest rate within 2 percentage points of best
5) Stay within EMU foreign exchange rates fluctuation limits.

Euroland now consists of 11 European countries led by Germany and
including Finland, with 6 aspirants member countries.  They are: Poland,
Czech Republic, Hungary, Greece, Estonia Solvenia

The value of the euro was set at 1.17 to US$1.00 at its introduction,
but is expected to free float by market forces.
Non cash transactions began on January 1, 1999, and cash will begin
circulating on January 1, 2002.

Aside from economic benefits, the EMU is expected to lead toward
political union.
This will virtually remove any prospect of war within Europe and make
European Union a world power and possibly more independent from the US.
EMU monetary policy will be conducted by the new ECB located at
Frankfurt, headed by Dutch Central Banker Wim Duisenberg with backing
from the Bundesbank of Germany, a bastion of conservative monetarism
(anti inflation fixation).  Its influence on the global economy will
rival the Federal Reserve, up to now enjoying the status of being the
only CB that matters.

The economic logic of a single European currency is:
Eliminate exchange rate costs and inefficiencies within a single
market similar in size to that of the US.
A supranational central bank to set a unified monetary policy for
economic stability in a region that had not been know for discpline
Under unregulated global finance capitalism, size matters.
There is an expectation of a long term trend toward wealth equalization
between member nations and within the population.

With the introduction of the euro, the global economic system moves into
a bi-polar monetary system with two dominant currencies.  This will
challenge the supremacy of the dollar as the world's sole reserve
currency, a position it has occupied since the end of WWII.
This currency advantage has permitted the US to dominate the global
economy, extend its finance capitalism globally, while pursuing
irresponsible monetary and fiscal policies at home, incurring recurring
budget deficits and massive national debts at boom times and bad alike.
The euro indirectly will force discipline on American economic policy.

Key basic commodities markets such as oil, coffee, wheat, etc., that
been denominated in dollar will now faced possible restructuring in
bi-currency regimes, increasing the bargaining power of consumers,
only slightly.
The short term fall of the dollar's value had been widely expected.
What was not certain was by how much, when and for how long.
Hong Kong only last month shifted 20% of its sizable (US$100 billion)
foreign reserves to the euro.  It was not a speculative move, although
its may well have speculative benefits.  It reflects the economic and
trade relations between the EU and Hong Kong.
The US bond market is bracing for the worse when mouthing calm.

The Federal Reserve's ability to set US interest rates will be
constrained as the world discovers an alternative reserves currency.
If the world's central banks and institutions should choose to park a
large portion of their foreign currency reserves in euro, a run on the
dollar may occur, driving up US interest rates and causing a crash of
the stock markets, with resultant high unemployment and  business
failures -
recession.  Blair warned of such an eventuality yesterday at Davos.
American multinational corporations will become less transnational in
character in Europe and their convergence and loyalty to US natinal
interests will be weakened.

Geopolitically, Russia will be nervous that former Soviet republics and
satellites joining Euroland to form a kind of economic NATO that would
lead to a political union in the form of a new Euro empire.
1998 saw the massive failure of economic reform in Russia that resulted
in the reformers being forced from power.
The West, which had invested in Russia, would never recover its
investments or collect on their loans.  Russia defaulted again on a US$
364 million debt on Dec. 28, 1998 and the news did not even make the
front page of the NY Times, though it created trouble for some hedge
funds down the road and led eventually to problems in Brazil.
As a result, investment and credit ceased flowing into Russia, and
Western political influence plummeted.

Repeating history, Russia has begaun to swing from pro-West to
blame and contempt.  The pro-West politcians who dominated Russian
politics for the past decade were replaced by Slavophiles, who will seek
to dampen Western influence. Russia will seek to use the euro against
the US economically.
Russian nationalism and anti Americanism are again on the rise.  US
bombing of Iraq and Kosovo made the Russians lament their loss of great
power standing.  Every significant faction in Russian politics agree
that the loss of great power status is intolerable. This powerful
national pride is now the major theme of uniting the country.

Germany is now deeply torn in seeking its destiny.
Hans Tietmeyer, head of the Duetche Bundesbank, in an op-ed article in
the WSJ (January 4, 1999) declared monetary stability as the euro's
cautioning the national policies on tax social socurity require close
coordination, including "sizable financial-equalization scheme" among
member countries, as such an EMU monetary policy will have different
effects in each memeber state.  He also warned that EMU was no defense
against globalization problems, and called for radical reforms (in the
German perspective, anti-inflation) from tax and social security
policies and labor markets ploicies.  He acknowledged the importance of

The political instincts of the new German government, forged in the left
movements of 1960s, reflect a profound uneasiness with the United States
and its leadership, in economics and in European security. Yet, fear of
Russia is also visceral in Germany.  The EMU is an opportunity to
transform Germany into a legitimate leading component of a unified

Asia has been unable to generate sufficient capital to solve the
created by unregulated global financial capitalism, unable to
its economies to generate that needed new capital, and unwilling to
allow an uncontrolled influx of American capital on American terms or
unregulated terms.

The euro may open an alternative source of capital for Asia with a part
of the West that is perceived as less predatory.
Asia may be forced to seek to insulate itself from the United States to
create Asian institutions to supplant the global institutions within
which Asian economies have been unable to participate on a equal basis.
Asian economies will resist American demands for further trade
liberalization, rely instead on Asian and regional solutions, and use
the yen and the euro as reserve currencies as counter balances against
the almighty dollar.

Like Russia, Asia's efforts to work around its fundamentally insoluble
economic malaise will lead to increased friction with the United States
on all levels.
This will lead to a new awareness of strange bed-fellow camaraderie.
The reemergence of a Moscow-Beijing strategic alliance to promote a
multi-polar world order is already under way, designed to block
unilateral American actions in Eurasia.
Furthermore, this relationship will seek to insulate Russia and China
from U.S. political and military pressure, and create politico-military
counter-pressure on the United States designed to elicit better economic
1999 was the year in which this alliance took shape, pushed by
internal economic crisis.  Europe will be a major center of the
multi-polar world of Sino-Russia strategy and the euro will give
economic foundation to this trend.  Germany took the lead to call for
Chinese participation in the G8.

Japan too is increasingly at odds with the United States over economic
As U.S. pressure on Japan to liberalize its markets increases, Japan's
search for alternatives will increase in reaction.
The Japan has announced its intention to promote a dollar-euro-yen
tri-polar currency regime early in 1999.
The yen has been rising against the dollor since late 1998, from a low
147 to below 110 now, ever since Japan pushing up Japanese bond yields,
causing Japanese investors to pull out of dollar back into yen.  The
gives the Japanese siubstantial clout in pushing for a dollar-euro-yen
arrangement.  If the yen pull out gains momentum, the damge to the
and the US economy will be drastic.

France is already clearly cooperating with China and Russia.  This was
visible in the Iraq affair.  France will put pressure on the new Europe
powerful with the new euro.
French foreign policy being traditionally anti-American, the EMU will
escape this influence.

Socialist movements, having been pushed to the sideline for more than a
decade, and re-emperging in Europe, will find tactical opportunities in
the complex restructuring of the global order, accelerated by the
emergence of a unified Europe and a bi-currency (or tri-currency) global
economy.  The emergence of post Keyseian influence is noticable
everywhere outside the US, when prominent formee supply siders call for
dratic fiscal stimulant measures.  Even the IMF has turned Keynesian.

What is obvious is that the euro will cut transaction costs and, more
important, eliminate currency risk within the EU. Most big firms hedge
against exchange-rate fluctuations, but a lot of smaller enterprises
the cost prohibitive. Many believe the promise of
exchange-rate stability outweighs any loss of interest-rate flexibility.

The prediction of Soros that the pound sterling will be severely pulled
between the different dynamics of the dollar zone and the euro zone has
come true.

The ECB will ensure low inflation at all costs - one of these costs may
well be temporary dips of the euro against the dollar. Monetary
stability will be buttressed by the Stability Pact, which, by setting
rules for deficits, will give governments the wherewithal to run
counter-cyclical fiscal  policies.

Germany led by Schroeder is becoming very arkward about subsidising
development in the rest of Europe to the tune of 20 billion euros a
despite the uneven accumulation of capital disproportionately to
No wonder that Blair and Schroeder have had to argue in public about
budgetary contributions. It is also no wonder that harmonisation of tax
rates has come up as an embarrassingly controversial issue.

The political risk is one of legitimacy. The Bundesbank has political
legitimacy, so does the Bank of England. People accept the decisions
made on monetary policy by these institutions even when they are
unpopular. The ECB has no such legitamacy. It was set up with the
express intention of keeping monetary policy divorced from the people.
There will be no chance for parliaments to grill the Bank's  governor,
Wim Duisenberg, and board members will sit for only one, fixed term. But
what will happen in a country such as Spain - which has very high
unemployment - when the ECB decides that conditions across Europe
warrant higher rates?

The economic risk is that the single currency may fail because it has
been designed for the challenges of a previous era of inflation.
Prices are falling across much of Europe and the globe, yet the ECB has
an inflation target which is worryingly assymetrical. The Bank of
England has an inflation target of 2.5 per cent, and has to explain its
actions should the actual rate deviate from that central rate. The ECB
has no such safeguard, but is simply required to keep inflation below 2
per cent.

Recent wrangling about tax harmonisation misses the point. What the new
breed of left-leaning finance ministers should be concentrating on is
standardising taxation, but reforming ECB statutes  and ensuring fiscal
and monetary policy work in tandem.

The deflationary bias of the ECB could lead to poor growth and
among politicians. To limit electoral fallout, governments might then
take off the fiscal brakes, pushing up public  spending. The ECB might
respond by keeping rates higher, leaving Europe with a combination of
tight monetary and loose fiscal policy - the opposite of what it may

The practical problem is how to resist pressure to push the euro from
becoming too strong, too early. Europe is running a healthy current
account surplus (though Summers called it second rate) and the euro
continues to be touted as a rival reserve to the dollar, despite current
lows. There are rebalancing of portfolios internationally, and this will
have the effect of weakening a US currency that looks more vulnerable by
the month. A strong euro would be good for the credibility of the ECB,
but disastrous for growth in the EU at this moment.

Henry C.K. Liu

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