The dollar is the world reserve currency. This gives a huge subsidy to the US economy because if a country wants to hold lots of dollars in reserve they must supply the US with goods and services in return for those dollars. In return the US creates a bit more credit. The more dollars there are circulating outside the US, the more goods and services the US has imported virtually for free. This is how the US manages to run a huge trade deficit year after year without apparently any major economic consequences. No other country can run such a large trade deficit with impunity. It is in effect getting a massive interest-free loan from the rest of the world.
One of Europe's primary objectives, if not the primary objective, of setting up the Euro was to try and get some of this free lunch for Europe. If the Euro became a major reserve currency, or better still replaced the dollar as the major reserve currency, then Europe too could get something for nothing.
This would be a disaster for the US. Not only would they lose their subsidy, which has been increasing in size and in importance to American economic well being as the years have gone by, but countries switching to Euro reserves from dollar reserves would start spending their dollars in the US. In other words the US would have to start paying its debts to other countries. As countries converted their dollar assets into Euro assets the US property and stock market bubbles would, without doubt, burst. The Federal Reserve would no longer be able to print more money to reflate the bubble as it is currently openly considering doing, There is, however, one major obstacle to this happening: OIL! Oil is of course by far the most important commodity traded internationally, and if you want to buy oil on the international markets you usually have to have dollars.
Until recently all OPEC countries agreed to sell their oil for dollars only. This meant that oil importing countries, like Japan, needed to hold dollar reserves in order to be able to buy oil. So long as this remained the case, the Euro was unlikely to become the major reserve currency. There is not a lot of point to stockpiling Euros if every time you need to buy oil you have to change them into dollars. But in November 2000 Iraq switched to the euro, with potentially perilous consequences for the US. Only one country has the right to print dollars: the US! If OPEC were to decide to accept euros only for its oil, then American economic dominance would be over. Not only would Europe not need dollars anymore, but Japan which imports over 80% of its oil from the Middle East would have to convert most of its dollar assets to Euro assets (Japan is of course the major subsidiser of the US). The US on the other hand, being the world's largest oil importer would have to acquire Euro reserves, i.e. it would have to run a trade surplus. The conversion from trade deficit to trade surplus would have to be done at a time when its property and stock market prices were collapsing and its own oil supplies were contracting. It would be a very painful conversion; potentially disastrous.
The purely economic argument for OPEC converting to the Euro, at least for a while, seem very strong. The Eurozone does not run a huge trade deficit like the US, nor is it heavily indebted to the rest of the world like the US. Nearly everything you can buy for dollars you can also buy for Euros. Furthermore, if OPEC were to convert their dollar assets to Euro assets and then require payment for oil in euros, their assets would immediately increase in value. Also, since oil importing countries would be forced to convert their reserves into euros, whose price would therefore be driven up. OPEC could then at some later date back some other currency, maybe the dollar again, and again make huge profits. This would offer a virtually inexhaustible source of profit for OPEC.
But of course it would not be a purely economic decision. The Eurozone countries do not threaten Middle Eastern countries militarily as the US does.
One article, written at the time the decision was made, claimed it made no financial sense and would cost Iraq millions. According to this "expert" the decision to convert was made by people who "are not experts, they are not central bankers, they are not even oil men". At the time the article was written, the euro was worth 82 US cents. It is now worth about $1.05. So on economic grounds alone, the Iraqi decision has been a huge success (the $10 billion Iraqi fund at the UN, mentioned in the article, has apparently also since been converted). There may however be military consequences to it. The economic threat to the US may be influencing it in its belligerent stance towards Iraq.
One other OPEC country has been talking publicly about possible conversion since 1999: Iran. And of course it has since been included in the "axis of evil".
A special thanks to Boudewijn Wegerif for his input in writing this report. From Claire Foss journal at
http://www.cfoss.com/sin.html
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