[A-List] THE DOLLAR VS THE EURO

[Hudsonmi@xxxxxxx]

THE DOLLAR VS THE EURO
    There has been a lot of talk about OPEC and a number of other countries diversifying their foreign exchange reserves by shifting from dollars to euros. 
    In some quarters this has been viewed as a move to "bring down the American Empire." Moving out of the dollar, it is claimed, would stop America's free ride.
    Well, not exactly yet!
    On Thursday at the Forecasters Club I spoke with David Hale, who writes often for the Financial Times on international affairs and is quite well connected with U.S. officials. He told me that he expects the euro to be forced up to $1.40 against the dollar this year. The expectation, he explained to the group, was that Europe and Asia would finance 60 percent of the U.S. domestic budget deficit this year, as a result of the balance-of-payments deficit ending up in the hands of foreign central banks - mainly Asia and Europe - and placed in U.S. Treasury bonds.
    Suppose that OPEC, Venezuela and some Islamic countries move out of the dollar into euros. This will put further upward pressure on the euro's exchange rate against the dollar. The main pressure would be felt by Germany, which went into the European monetary system with an overvalued d-mark as a result of its merger with East Germany (which David likened to a leveraged buyout at too high a price for the entity being acquired). The pressure will be for Germany either to undertake structural reform (i.e., anti-labor, even Thatcherite market reforms, winding down of pension, social security, health and other public services) or - and this thought must have U.S. diplomatic strategists chuckling - forcing Germany to withdraw from the European monetary union.
    So the currency diversification move, ostensibly threatening the dollar's free ride in the long run, would help break up its number one nemesis these days, the European monetary union, in the short run.
    The political issue is whether Germany will continue to subsidize Ireland, whose currency is undervalued. (Note: now that sterling is falling, it will make it easier for it to join the Euro without experiencing German-type problems later on.)
    Many of the opponents of America's free ride keep looking for instant victories without thinking tactically.
    Michael Hudson