By Paul Harris
YellowTimes.org Columnist (Canada)

(YellowTimes.org) - There are many reasons for George Bush's single-minded
drive toward Baghdad. In other articles I have written for YellowTimes.org,
I hinted that a not so obvious reason for the drive against Iraq is Bush's
war against Europe. In fact, I have now come to believe that is the primary
reason for his Iraqophenia.

Whenever a nation decides to go to war, there are plans made for who is
going to win and who is going to lose; no one goes to war expecting to
lose, but it isn't always the obvious target of the aggression that is the
real thrust behind the war. Sometimes, it isn't a case of what you expect
to win from a war, but rather a case of what you hope someone else loses;
and it doesn't have to be your stated enemy who you hope will sustain the
losses.

In this case, Bush's hoped-for victim is the European economy. It is
robust, and is likely to become much stronger in the easily foreseeable
future. Britain's entry into the European Union is inevitable; Scandinavia
will join sooner rather than later. Already, even without those countries,
there will be 10 new member nations in May 2004, which will swell the GDP
of the E.U. to about $9.6 trillion with 450 million people as against $10.5
trillion and 280 million people in the United States. This represents a
formidable competing block for the United States but the situation is
significantly more complex than what is revealed just by those numbers. And
much of it hinges on the future of Iraq.

I have written before, as have many others, that this upcoming war is about
oil. To be sure there are other reasons, but oil is the single most
impelling force. Not in the way you might expect, however. It isn't so much
that there are believed to be huge untapped oil reserves in Iraq, untapped
only due to outdated technology; it isn't so much an American desire to get
its grubby hands on that oil; it is much more a question of whose grubby
hands the Americans want to keep it out of.

What precipitated all of this was not September 11, nor a sudden
realization that Saddam was still a nasty guy, nor just the change in
leadership in the United States. What precipitated it was Iraq's November
6, 2000 switch to the euro as the currency for its oil transactions. At the
time of the switch, it might have seemed daft that Iraq was giving up such
a lot of oil revenue to make a political statement. But that political
statement has been made and the steady depreciation of the dollar against
the euro since then means that Iraq has derived good profits from switching
its reserve and transaction currencies. The euro has gained about 17
percent against the dollar since that time, which also applies to the $10
billion held in Iraq's United Nations "oil for food" reserve fund.

So the question arises, as it did for George Bush, what happens if OPEC
makes a sudden switch to euros? In a nutshell, all hell breaks loose.

At the end of World War II, an agreement was reached at the Bretton Woods
Conference which pegged the value of gold at $35 per ounce and that became
the international standard against which currency was measured. But in
1971, Richard Nixon took the dollar off the gold standard and ever since,
the dollar has been the most important global monetary instrument, and only
the United States can produce them. The dollar, now a fiat currency, is at
a 16-year trade-weighted high despite record U.S. current-account deficits
and the status of the U.S. as the leading debtor nation. The U.S. national
debt as of April 4, 2002 was $6.021 trillion against GDP of $9 trillion.

Trade between nations has become a cycle in which the U.S. produces dollars
and the rest of the world produces things that dollars can buy. Nations no
longer trade to capture comparative advantage but rather to capture needed
dollars to service dollar-denominated foreign debts and to accumulate
dollar reserves in order to sustain the exchange value of their domestic
currencies. In an effort to prevent speculative and potentially harmful
attacks on their currencies, those nations' central banks must acquire and
hold dollar reserves in amounts corresponding to their own currencies in
circulation. This creates a built-in support for a strong dollar that in
turn forces the world's central banks to acquire and hold even more dollar
reserves, making the dollar stronger still.

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 reality is that the strength of the dollar since 1945 rests on being
the international reserve currency for global oil transactions (i.e.,
"petro-dollar"). The U.S. prints hundreds of billions of these fiat
petro-dollars, which are then used by nation states to purchase oil and
energy from OPEC producers (except presently Iraq and, to some degree,
Venezuela). 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 recycling of petro-dollars is the price the
U.S. has extracted since 1973 from oil-producing countries for U.S.
tolerance of the oil-exporting cartel.

Dollar reserves must be invested in U.S. assets which produces a
capital-accounts surplus for the U.S. economy. Despite poor market
performance during the past year, U.S. stock valuation is still at a
25-year high and trading at a 56 percent premium compared with emerging
markets. The U.S. capital-account surplus finances the U.S. trade deficit.

Since it is the U.S. that prints the petro-dollars, they control the flow
of oil. Period. When oil is denominated in dollars through U.S. state
action and the dollar is the only fiat currency for trading in oil, an
argument can be made that the U.S. essentially owns the world's oil for
free.

So what happens if OPEC as a group decides to follow Iraq's lead and
suddenly begins trading oil on the euro standard? Economic meltdown.
Oil-consuming nations would have to flush dollars out of their central bank
reserves and replace them with euros. The dollar would crash in value and
the consequences would be those one could expect from any currency collapse
and massive inflation (think of Argentina for an easy example). Foreign
funds would stream out of U.S. stock markets and dollar denominated assets;
there would be a run on the banks much like the 1930s; the current account
deficit would become unserviceable; the budget deficit would go into
default; and so on.

And that's just in the United States. Japan would be particularly hard hit
because of total dependence on foreign oil and incredible sensitivity to
the U.S. dollar. If Japan's economy tumbles, so does that of many other
countries, especially the United States in a crescendo of dominos.

Now, this is the potential effect of a "sudden" switch to euros. A more
gradual shift might be manageable but even that would change the financial
and political balance of the world. Given the size of the European market,
its population, its need for oil (it actually imports more oil than the
U.S.), it may be rapidly approaching that the euro will become the de facto
monetary standard for the world.

There are some good reasons for OPEC as a group to follow Iraq and begin to
value oil in euros. There seems little doubt that they would relish the
opportunity to make a political statement after years of having to kowtow
to the U.S., but there are solid economic reasons as well.

The mighty dollar has reigned supreme since 1945, and in the last few years
has gained even more ground with the economic dominance of the United
States. By the late 1990s, more than four-fifths of all foreign exchange
transactions, and half of all world exports, were denominated in dollars.
In addition, U.S. currency accounts for about two thirds of all official
exchange reserves. The world's dependency on U.S. dollars to pay for trade
has seen countries bound to dollar reserves, which are disproportionately
higher than America's share of global output.

It is important to note that the euro is not at any disadvantage versus the
dollar when one compares the relative sizes of the economies involved,
especially given the E.U. enlargement plans. Moreover, the E.U. has a
bigger share of global trade than the U.S. and while the U.S. has a huge
current account deficit, the E.U. has a more balanced external accounts
position. One of the more compelling arguments for keeping oil pricing and
payments in dollars has been that the U.S. remains a large importer of oil,
despite being a substantial producer itself. But the EU is an even larger
importer of oil and petroleum products than the U.S., and represents for
OPEC a more attractive market, closer and less domineering.

The point of Bush's war against Iraq, therefore, is to secure control of
those oil fields and revert their valuation to dollars, then to increase
production exponentially, forcing prices to drop. Finally, the point of
Bush's war is to threaten significant action against any of the oil
producers who would switch to the euro.

In the long run, then, it is not really Saddam who is the target; it is the
euro and, therefore, Europe. There is no way the United States will sit by
idly and let those upstart Europeans take charge of their own fate, let
alone of the world's finances.

Of course, all of this depends on Bush's insane plan not becoming the
trigger for a Third World War, as it so readily might.

[Paul Harris is self-employed as a consultant providing Canadian businesses
with the tools and expertise to successfully reintegrate their sick or
injured employees into the workplace. He has traveled extensively in what
we arrogant North Americans refer to as "the Third World," and he believes
that life is very much like a sewer: what you get out of it depends on what
you put into it. Paul lives in Canada.]

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