'Were the US to go under, the world would turn to the Euro'

Article published on Feb. 15, 2007
Article published on Feb. 15, 2007
The five-year-old Euro may be trading above the dollar, but a stronger currency can damage Europe

With the the Euro now valued at 30% above the US dollar, there are countries outside the Eurozone who are changing their currency reserves into Euros. It may not be long before the oil barrel is valued in the European currency. Jordi Bacaría, professor of Applied Economiccs at the University of Barcelona and co-director of the University Institute of European Studies (Institut Universitari d’Estudis Europeus), explains the benefits and drawbacks of this appreciation of the Euro against the omnipresent American currency.

Iran, Venezuela and Indonesia have decided to change part of their reserves from dollars into Euros for reasons that are economical as much as they are political: how will this decision affect the dollar-Euro exchange rate?

It will be bad for the dollar. Asiatic countries like China have changed their reserves for economic reasons. If their main customer is the EU, it makes no sense for them to have their reserves in dollars. However, it doesn’t benefit them that the dollar is in decline. In the political framework, it’s a way for these countries to focus the attention of the US, to say ‘we have an influence over the US too’. Even so, the principal currency of exchange is still the dollar, so from an economic perspective, things don’t need to change in the medium term.

Do you think this trend will accelerate in the coming years?

What could happen is that oil is valued in Euros. If the dollar continues to fall, for all that OPEC raises the price of the barrel, it won’t be able to increase its income. So, yes, a lot of things would change and the US would be severely affected if it had to pay for oil in Euros, which is a much more expensive currency. How far does this benefit the EU while the US remains its principal commercial partner? If your main buyer loses his purchasing power, you don’t benefit at all.

Isn’t the strengthening of the Euro against the dollar limiting the competitiveness of European economies?

Yes, a strong Euro reduces competitiveness and even generates political tensions within the EU. Those who export most are most against the rise of the Euro. The danger lies in the fact that buyers can find other suppliers, so even if you reduce your prices, your customers will have already found a stable supply, and will not want to change back without really good reasons. Thus the problem is also the loss of markets. A medium term solution would be reducing production costs.

What political consequences might the rise of the Euro affect for the so-called transatlantic gap?

None at all. If the Euro has strengthened so much it’s because the dollar is very weak, not because the European economy has improved a lot: the US has a trade deficit and a huge administration. In fact, in times of crisis there is cooperation, as happened after September 11th between the Central European Bank and the Federal Reserves. In reality, the ideal would be to establish a 1:1 parity between the dollar and the Euro, but whenever it’s suggested both countries say no.

How does it affect the Euro not to have its own state?

It prevents it from making a big advance. It’s a currency that has fewer guarantees of stability. At least if the constitution were ratified we would have more mechanisms, but until that happens, the dollar offers guarantees that the Euro cannot.

What if the big countries like the UK, Sweden and Denmark came into the Eurozone?

If the constitution were ratified and its aims fulfilled - such as the 27 current members forming part of Europe – then our currency would be much stronger, not only in value but in political and economic influence. But I would not say as much as the dollar: you’d have to see how the American economy and politics reacted. Just because the Euro is healthy doesn’t mean that the dollar has to continue badly. That said, if the US were to go under, the world would turn to the Euro.

The Euro around the World

'Four oranges and 20,000 dinars, s'il vous plait'

'Sabah al-kheir Hamid, have you got change for 200 Euros? Yes? Right, can you change this for me and give me four orange juices too, s’il vous plaît.' Hamid, the greengrocer in El Biar in the centre of Algiers, is one of the many money changers in the city. A visit to his impressive épicerie (greengrocers), a discreet change of business cards and an invitation to call him if in need of Algerian dinars at a good rate of exchange. In a country with no ATMs and where going to the bank implies half a day lost, it seems the best way to change money is on the black market. Politically incorrect, it’s a practice that hotels, shops and even official tourist offices advise tourists to take advantage of as the quickest and the best value: the official Exchange rate is 1 Euro: 90 DA, but the black market price is around 5 Euros in the tourist’s favour.

For many Algerians, it’s a complementary job but one which is much more beneficial than their actual employment. ‘Moving’ Euros is getting easier and easier for them, as their country becomes more progressive and open its doors to more European visitors. So it’s normal to find money changers hanging around furtively on street corners, in market stalls or even in unofficial little offices, open and unashamed such as in the El-Fert shopping centre in Algiers.

Laura Feal (Algiers)

The Euro in Cuba

In 2002, one of the most popular health resorts in Cuba, Varadero, began accepting the Euro. Since then, and after the prohibition of the dollar in 2004, the European currency can be used in a variety of tourist locations, for accommodation, and entertainment. It is even used in education: students registering for the prestigious film and TV school must pay in Euros.

César Jiménez (Santiago de Chile)

(Photo homepage: cantare/ Flickr)