From the (Sunday supplement of the Unlimited)
Dated Sunday November 14
When America sneezes ...
As things look less and less bullish for the dollar, Europe should start worrying
By Will Hutton
There were two stories last week that will have world-shaping implications. The first was in a Paris hospital and a compound in Ramallah. The other, unfolding in the world's foreign exchange dealing rooms, hardly made it beyond the business pages, but deserves to be taken just as seriously. We witnessed the storm warnings of what promises to be a financial crisis of epic proportions, threatening both the US and the EU.
Europe and Asia have both been on the receiving end of massive foreign currency speculation for the past 20 years and the countries concerned have been left badly scarred. Italy, France and Britain have suffered currency crises that have overshadowed their politics for years; the Tories never recovered their reputation for economic competence after the pound was forced out of the ERM in 1992. In Asia, the experiences of Indonesia and South Korea tell a similar story.
The one country to have blithely sailed on through all this turbulence has been the USA, but that is what is about to change. The political consequences for George W Bush promise to be every bit as difficult as they have been for other governments. The dollar has been insulated because it is the linchpin of the international financial system. The US possesses the currency that is the everyday unit of account in international trade and finance; even al-Qaeda uses it to finance its terror network. The US has used this happy fact to go on an international rake's progress, spending regularly more abroad every year than it earns by a massive $500 billion. Its cumulative international debts stand at some $3 trillion. The rest of the world accepts the dollars because it needs and wants to; until the euro, there was no other choice . . . .
The big question in international finance is whether this process can carry on indefinitely, because there are different rules for the US and the dollar, or whether the dollar will fall like every other currency whose economy takes on debts that ultimately it cannot service.
Last week, the markets suggested the answer - the dollar is no different.
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