Dollar continues its way down, and we all have got used to it. All the medium- and part of the long-term economic forecasts incorporate this trend. Oil prices are on the contrary skyrocketing. These two trends are complementary. For surge of the oil price leaves the demand far behind (despite all the speculations about vast markets in India and China). High oil prices don’t hinder development of the world economy and it is rather the environmental threat that drives the search for alternative energy sources. Prices in the oil market are due to excess of money in the world economy and not to strong demand in oil.

Dollar going down and oil prices going up caused global economy crisis back in early 1970s. But the global economy has changed since then and the current situation is different at least in two essential aspects.

The first point is that back then the money overhang in the regulated capitalist system of economy was attributed by most experts to excessive social spending. Reducing public social spending was seen as an effective remedy (that’s why the majority of national governments still practice it). But today despite the rigorous public spending policy the world financial sector is awash with money, with the private industry causing more inflation than the state. And no one knows what to do, for the conventional economic theory simply turns a blind eye to this problem.

The second important difference is that back in 1970s there was no alternative to the American dollar, while lately euro has strengthened its position as the world currency.

Many periphery countries, including Russia, capitalize on the current situation. Oil and other deficit raw materials bring extra dollars to national economies. And this might even raise hopes that the hard times have passed. National debts are being paid off, foreign exchange reserves are being replenished. And redistribution of currency holdings in favor of the more stable euro compensates for the dollar’s fall.

Moreover, rise of the euro in the national financial markets set a good example. There is every likelihood that new regional currencies will appear soon. Kuwait has proposed introducing common currency in the Gulf countries. According to the aspirations of Venezuelan leader Hugo Chaves Bank of the South (Banco del Sur) that was created in Latin America could become generator of the regional currency. The East Asian states nourish similar hopes. The future of the Russian ruble could also be that of a regional currency. And again high oil prices only make the future of Russian currency more promising (as well as the English pound that in addition to other advantages rests on the North Sea oil).

You would say that dollar’s days are numbered. But that would be a snap judgment. For euro’s success stems from the fact that it does not have to be the world money and thus all the challenges of the globalization pass it by. Without doubt, if dollar was not the US national currency and the international money at the same time, America would not have even more economic challenges but those challenges would be of different level. Euro is strong as long as it circulates within Western Europe and thus is subject only to inflationary pressure of its economies.

Should the regional currencies come into being, euro’s role of the second world currency will decrease. This might benefit the European economy in general but will bury the ambitious projects to press dollar out of its number one position. And the world trade will still be estimated in dollars. According to another scenario there will be no common world currency and every region will try to reinforce its own currency and its own financial system. That would be a logical ending of the 20 years of globalization. For it is not the dollar in crisis but the global economic system as it was formed after the collapse of the Soviet Union.

Larger autonomy from the international market would certainly benefit the Russian economy, for it would foster reindustrialization and modernization of the country. The problem is that the Russian elites living from petrodollars are unlikely to see the true value of these alternatives.

Boris Kagarlitsky is Director of the Institute of Globalization and Social Movements

July 12, 2007

August 10, 2007