The Threat Of The Euro

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After yesterdays post exploring the petro-dollar cycle it is worth looking at the consequences that could arise in the event of its collapse. This doesn’t seem as far fetched as it perhaps was two years ago with the rise of another dominant world currency in the Euro, and its continued strength against the dollar only stands to undermine confidence in its American counterpart. The threat of the Euro is a big one, and any OPEC suggestion on altering the currency its oil is sold in must send shivers down the spine of America.

As a ball park America currently has about 5% of the world’s population and consumes around 25% of its oil, meaning that the US is reliant on oil as an import. As mentioned yesterday, for the petro-dollar cycle to work America is also reliant on oil being sold in US dollars ultimately making the dollar a global trading currency.

Now, enter the Euro and its growing strength against the dollar, and the possibility of a new currency replacing the dollar as the global trading currency. If oil was to be sold in Euros, America would have to sell goods to Europe in Euros to get the desired currency in order to purchase oil. As mentioned yesterday they can’t make their own as Brussels is the only place Euros can be printed. America could exchange them but this would then mean she is dependent on fluctuating currency exchange rates, which as demonstrated by the current price of the dollar would be costly. As the US imports more oil than it exports goods to Europe the effect would be devastating to the American economy. If this did happen and the Euro became the worlds trading currency the US economy could be crushed, having drastic social effects along with it.

America has sustained a huge national debt for too long and economists have been warned about the bubble bursting, and repercussions it would have on global markets. We are currently seeing the effects of the currency weakening against the Euro on consumers in the US, and this is whilst the US dollar remains the worlds trading currency. Now it seems OPEC members are looking at the possibility of converting their cash reserves into other currencies, a move which would end the petro-dollar cycle for good. If this happened estimates put the dollars value at crashing anything between 20-40% creating a true economic crisis for the Americans.

With the consequences of the petro-dollar cycle breaking severe, it is easy to understand why America would go to great lengths to keep it in place, protecting her economy and stopping an economic meltdown taking place.

With this thought is it unthinkable that such steps have been taken in the past. Tomorrow we will look into this further.

                    

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