WAKE UP CALL

What do the world?s best-paid model and Venezuela?s firebrand president Hugo Chavez have in common, if recent media reports are to be believed? Answer: they both prefer the European Union?s single currency, the euro, to the dollar. Chavez has been haranguing the Organization of Petroleum Exporting Countries (OPEC) to demand payment for its oil in euros instead of ?imperialistic? dollars, and Brazilian supermodel Gisele Bundchen caused a brief sensation late last year when she was said to be planning to use the euro for all her future contracts.

Bundchen?s alleged affront to the dollar was vigorously denied after it created an indignant flurry in the U.S. media. But the otherwise trivial story, even if untrue, shone a rare celebrity spotlight on an issue normally reserved for debate among obscure international monetary experts, the possibility that the euro could one day present a real challenge to the mighty dollar in global markets.

Economists have been discussing whether the euro could theoretically replace the greenback as the world?s premier reserve currency ever since it was introduced for financial transactions in 1999, before materializing in the form of actual coins and bills in 2002. Now, however, with the dollar's sharp drop in the foreign exchanges, the euro is becoming an increasingly plausible alternative and the debate less theoretical.

Most European economists are confident that Europe will suffer fewer economic and financial upheavals than the United States from the credit crunch caused by the subprime lending crisis. And a distinct note of superiority can be detected in the recent remarks of some EU leaders.

Here, for instance, is a comment about the crisis by Jean-Claude Juncker of Luxembourg, chairman of the 15-member euro zone: "We have to be concerned, but a lot less than the Americans, on whom the deficiencies against which we have warned repeatedly are taking bitter revenge." Joaquín Almunia of Spain, EU Commissioner for Monetary Affairs, says Europe's economy is sounder than America's with regard to current account deficits, savings levels and fiscal balances. "Moreover," he adds tartly, though not quite accurately, "we haven't got subprime mortgages in our financial system."

It would hardly be surprising if Europeans were enjoying a touch of schadenfreude over America's woes, after years in which Americans have poured scorn on Europe's sclerotic economies and the apparent inability of Europeans, particularly in France and Germany, to reform them. Many Americans were especially scathing about the introduction of the euro, first claiming it would never happen and then that it would never work. Some simply tried to ignore it.

The story is told of a prominent European central banker, on a speaking tour of the United States to explain the importance of the new currency, who found himself at a meeting with an audience of just one person. Gamely, the European delivered his speech anyway, and was enthusiastically applauded by his single listener. When he started to leave, the listener said: "Please don't go. I'm the second speaker."

Apocryphal or not, the story accurately reflects America's initial apathy toward the euro, combined with a lamentable lack of foresight outside a small circle of financial analysts. The euro is now firmly established as the world's second international currency and, after a rocky start, has steadily strengthened for the past two years. Starting at a dollar value of $1.18 in January 1999, the euro hit lows of around 85 cents in 2000 and 2001, and then climbed back to $1.18 in November 2005. It has since consistently outperformed the dollar, coming close to the symbolic rate of $1.50 last November.

True, much of this reflects the dollar's weakness, rather than the inherently attractive qualities of the euro. European economic growth has been consistently lower than in the United States over the last 10 years and, after a brief spurt, is now fading again. The euro zone has lagged behind America in productivity gains, employment and labor mobility. Nevertheless, no less an authority than former Federal Reserve Chairman Alan Greenspan has said it is ?absolutely conceivable? that the euro will replace or equal the dollar as a reserve currency. Some economists believe that could happen by 2020 if the dollar's depreciation continues and the euro zone expands to include all EU member countries, including Britain (unlikely in the foreseeable future.)

Jean-Claude Trichet, the French President of the European Central Bank (ECB), points out that trade historically has been a key determinant of the international use of currency, as demonstrated by the pre-eminence of the United States, and previously Britain, as global traders. Now Europe is the world?s largest trader. According to some estimates, the euro has increased its share of international foreign exchange reserves from about one fifth in 1999 to between a quarter and a third toward the end of 2007.

With the dollar?s fall, the euro is looking increasingly good as ?a store of value,? one main function of a reserve currency. Politics are also a factor. Chavez?s attacks on the dollar in OPEC, backed by Iranian President Mahmoud Ahmadinejad, are driven as much by anti-Americanism as by financial considerations. Although dollars circulate widely on the island, Cuba has made the euro the official currency of its most famous beach resort, Varadero.

Economists still disagree over the advantages and disadvantages of running a reserve currency, although there are some obvious benefits for the issuing country. These include convenience for its residents, more business for its financial institutions, the ability to borrow large amounts of its own currency abroad, and political power and prestige. Britain's gradual loss of its reserve currency status in the 20th century coincided with declining global influence.

The ECB insists that its policy is strictly neutral and that markets should decide whether the euro gains ground as a reserve currency. But reserve currencies do not appear and disappear overnight. Countries with huge reserves of dollars will not want to switch rapidly to euros for fear of further diminishing the value of their dollar holdings, and there is great inertia in the system. After the United States overtook Britain as the world?s biggest economy in the 1870s, it took another 70 years and two World Wars for the dollar to displace the pound as the prime international currency. The whims of Latin American strongmen and supermodels are unlikely to make much immediate difference.

Reginald Dale is a senior fellow at the Center for Strategic and International Studies in Washington DC and a former senior foreign correspondent, commentator and editor for the International Herald Tribune and the London Financial Times.

This was excerpted with permission from US Industry Today, an online publication from Positive Publications LLC.