Brazil - Brasil - BRAZZIL - Opinion: Brazil Must Adopt the Euro Immediately - Brazilian Economy - June/July 2002

June/July 2002

The Euro, Now

With Lula almost certain to be Brazil's next President
the only way to avoid chaos and an economic meltdown of the
Brazilian economy is for Brazil to adopt the euro
immediately. And use the strength of the
currency to hold up the country.

Ricardo C. Amaral

On December 12, 2001 I sent the enclosed letter to the president of the European Central Bank, regarding Brazil adopting the euro as its new currency. In January 2002. I received a letter from a senior official of the European Central Bank in response to my letter. I was pleasantly surprised by the content of that letter. It is clear to me by their answer, that the door is open to Brazil at the European Central Bank, if Brazil decides to adopt the euro as its new currency.

In my letter to the president of the European Central Bank I mentioned that the US dollar was overvalued over the price of gold at US$ 295/oz at that time and the euro trading at US$ .85¢. Six months later, on June 4, 2002, gold was trading at US$ 325/oz and the euro was trading at US$ .95¢; during this period the US dollar declined in value by 10.2 percent in relation to gold and also declined by 11.8 percent in relation to the euro.

The alarm bells finally started ringing in the United States and abroad. The Business Week magazine issue of May 6, 2002 had an article entitled "Debt Overseas Stirs up Trouble at Home, " in which the magazine stated, "The growing current-account deficit might set the U.S. up for a fall. U.S. financial obligations to the rest of the world are once again on the rise as America grows ever more dependent on foreign capital to finance its growth. Back in March, Federal Reserve Chairman Alan Greenspan noted that over the past six years, about 40 percent of the increase in the U.S. capital stock was financed by foreign investment, a pattern that will require an ever-larger flow of interest payments going out to foreigners. "Countries that have gone down this path invariably have run into trouble," said Greenspan, "and so would we."

The Economist magazine issue of April 27th- May 3rd, 2002, also had a similar article on the US current-account deficit. It was called "The O'Neill doctrine". According to the British publication, "America's huge external deficit is an accident waiting to happen. (...) The International Monetary Fund says that America's current-account deficit poses one of the biggest risks to the world economy. (...) If capital inflows were to dry up, the current-account deficit would have to shrink, either through a slump in domestic demand or a fall in the dollar, or both.

"A study by the Federal Reserve of large current-account deficits in developed economies found that deficits usually began to reverse when they exceeded 5 percent of GDP. And this adjustment was accompanied by an average fall in the nominal exchange rate of 40 percent along with a sharp slowdown in GDP growth. America is likely to move into this danger-zone by the end of the year."

The New York Times published on May 2, 2002, the article "Dollar Falls as Top Official Casts Doubt on Intervention". They wrote: "After saying his goal was to avoid upsetting the financial markets, Treasury Secretary Paul H. O'Neill did just that today by sparring with members of a Congressional committee about the nation's financial condition and leaving some investors with doubts about his willingness to defend the weakening dollar.

On May 16, 2002, The New York Times reported in an article by Jeff Madrick that Jerry Jasinowski, head of the National Association of Manufacturers; Thomas Palley, assistant director of policy at the A.F.L.- C.I.O.; and J. Fred Bergsten, of the Institute of International economics, have argued that the dollar is overvalued 20 to 25 percent. (...) The greater danger is that a change in dollar policy could precipitate a run on the dollar and the very collapse we fear most."

The Washington Post had an article on May 29, 2002 by Robert J. Samuelson: "Superdollar: Friend or Foe " In it, Samuelson writes, "If you want to scare yourself, contemplate the following. The dollar begins to fall. That is, its value slips relative to other currencies. Foreigners with massive investments in U.S. stocks and bonds begin to sell their holdings. They fear currency losses on their American investments because a depreciated dollar would fetch less of their own money. The selling then feeds on itself. The stock market swoons. American consumer confidence withers. The recession resumes and spreads to the rest of the world through lower U.S. imports. (…) There are huge foreign investments in the United States that could be sold quickly. At the end of 2001, foreigners owned $1.7 trillion of U.S. stocks and $3.2 trillion of government and corporate bonds. The conditions for a dollar crisis exist, but that doesn't mean one will happen".

Avoiding Chaos in Brazil

The economic situation in Argentina has been deteriorating and has become chaotic. I don't know why the Brazilian government does not adopt the euro immediately to try to stop the coming economic catastrophe and collapse of the Brazilian economy similar to the Argentinean experience.

With the polls showing Brazil's presidential front-runner Luiz Inácio da Silva, known as "Lula", widening his lead over the rest of the pack, with the increased chances of a Lula's victory in the coming elections, Wall Street started having an anxiety attack. Wall Street began worrying that the left-wing Workers Party candidate may increase spending to fund social programs and jeopardize macroeconomic stability in Brazil.

If Brazil does not adopt the euro immediately, and decides to keep its current currency the real, and Lula is elected president of Brazil in the coming election, what will happen to the value of the real?

Look at Argentina today and you can see the future of the Brazilian economy. If chaos, anarchy, devaluation, and major economic crisis is what the Brazilian government wants, then their goal will be accomplished in the near future.

Brazil is a democracy and Brazilians should honor the result of the election if Lula becomes the next president of Brazil. But I still believe it is not a good idea to elect a left-wing president in Brazil, mainly now that Brazil could become an option for investments for the money leaving the United States for a safer haven (see "The religious war that changed the USA" published in Brazzil Magazine, March 2002, pg. 20.) The election of a left-wing president in Brazil would undermine the Brazilian image necessary for Brazil to become that safer haven for the capitalist world.

With only four months to the presidential elections in Brazil, at this point a Lula victory seems almost certain. After trying to be elected president so many times, finally, Lula will achieve his goal and he will become the next president of Brazil.

There is an option available to the Brazilian government to avoid the possible collapse of the Brazilian economy similar to what is happening in Argentina. The only way out to avoid an economic meltdown of the Brazilian economy is for Brazil to adopt the euro immediately, and use the strength of the euro as a support to hold up the Brazilian economy.

Now that we know for a fact that adopting the euro is a viable option for Brazil, then it is imperative that the Brazilian government move in that direction as soon as possible, before the smart money starts leaving Brazil and starts a stampede.

Letter to the European Central Bank

December 12, 2001

Dr. Willem F. Duisenberg


European Central Bank

Postfach 16 03 19

D-60066 Frankfurt am Main


Dear Dr. Duisenberg:

In the last two years I have written various newspaper articles published here in the United States regarding Brazil and the euro. Enclosed is a copy of my last article of that series. I have been recommending that Brazil replace its current currency the Real for the currency of the European Monetary Union the euro.

In the coming years most countries of the world will have to make a drastic decision; they will have to decide if they will adopt as their new currency the euro, the US dollar or some other currency from Asia . I believe that Brazil should adopt the euro and also should integrate its economy with the European Union's economy.

Keep in mind that it will be just a matter of time for the European Central Bank to be forced to deal with that issue triggered by some major international monetary crisis.

Today, the Brazilian economy has an Achilles heel, which is its currency the real. On January 1, 2002, the international monetary game played in the last 30 years comes to an end. Starting in January the US dollar will not be the only game in town. I believe the euro will become a major competitor to the US dollar, and will be accepted around the world as a major currency. The euro will become an important part of the monetary reserves of most countries.

When the time comes for the European Monetary Union to make the decision to accept Brazil as one of its members, that decision will be very important not only to Brazil, but will have a major impact on the international monetary scene for decades to come. It will be for the benefit of the members of the European Monetary Union to offer Brazil membership in that monetary club.

Brazil has a young and vibrant population and can offer to the European Union a growing market with 170 million people. The adoption of the euro by Brazil would stabilize the Brazilian economy and would open the door to many new economic opportunities between Brazil and the members of the European Monetary Union. This new stable monetary environment would provide new opportunities for European investments in Brazil.

I want you to keep in mind when the European Monetary Union debates the merits of accepting Brazil for membership, that the country Brazil is one of the jewels of our planet. Brazil has a privileged geopolitical location on our globe. Brazil has an up-coming emerging market economy with abundant natural resources, including the magnificent Amazon jungle, and also a modern economy evolving and adapting very fast to accommodate the new technologies developed around the world.

The next time that Brazil decides to change its currency again, they will have only two alternatives to choose from this time around; either they adopt the euro or they adopt the US dollar. I believe that it would be a privilege for the European Monetary Union to have Brazil as a member of that club. Brazil and the members of the European Monetary Union will have much more to gain from that association than if Brazil adopts the US dollar. Please be prepared in the future to welcome and to offer Brazil membership to the European Monetary Union.

I believe that the Brazilian economy matches much better with the economies of the countries which comprise the European Monetary Union than to the economy of the United States. From a Brazilian point of view, it is more appealing to adopt the euro instead of the US dollar, because of the US dollar's vulnerability to the international monetary market system.

The long term US trade imbalances have created a large pool of US dollars in the hands of relatively few central banks around the world. These nations continue to run large trade surpluses with the United States, and they continue to increase the pool of US dollars held by their central banks.

Forbes Magazine's columnist Steve Hanke estimates that today 70 percent of US currency circulates outside the United States. The major holders of this currency are the euro countries, Japan, China, Hong Kong, Taiwan, South Korea, Indonesia, and Singapore.

Probably today, there is an oversupply of US dollars outside of the United States. Gold at US$ 295/oz might be undervalued when compared to the US dollar.

At US$ 295/oz gold provides about 15 percent of official world monetary liquidity. Central banks hold only one-third of the above ground gold supply available. Gold is the second largest component of international monetary reserves after the US dollar.

Gold and the euro will became increasingly important parts of the international monetary reserve system and their gains will be at the expense of the US dollar.

If any of these countries decides to move their monetary reserves from the US dollar into gold, the price of gold would increase versus the US dollar. If that happens in the near future we will have a major international monetary crisis in the world.

About 75 percent of the US dollars circulating outside the United States are in the hands of these few Asian central banks, and if any one of these countries decides to sell their US dollar monetary reserves to buy gold it will produce a stampede to exit the US dollar, creating a gold and euro buying panic.

Remember the euro countries also have a large supply of US dollars, which they can use to buy gold. When the European Central Bank moves from US dollar into gold, the euro will become stronger versus the US dollar, in turn giving an incentive to the other countries to move their international monetary reserves also from US dollar into euro or gold.

When this US dollar collapse becomes reality, the less developed countries will be the most devastated by this event, because these countries hold only a small fraction of their reserves in gold or euro.

This oversupply of US dollar circulation outside the United States might prove to be the Achilles heel of the US economy and also can become a nightmare to the Federal Reserve. The Federal Reserve would need to raise interest rates in the US, creating a major problem for the US economy and the financial markets.

I believe that it will be too risky for Brazil to adopt the US dollar because of this oversupply of US dollars circulating around the world. It will be better for the Brazilian economy in the long run for Brazil to adopt the euro.

The current US dollar based international financial system is about to go through a dramatic change because of the new competition from the euro. I don't know, when or what will trigger the coming events, since no finance minister or central banker wants to be blamed for launching the world into a major international monetary crisis.

I hope you will enjoy reading the enclosed article about Brazil adopting the euro, and please share this information with the Finance Ministers of the countries which are members of the European Monetary Union.

Thank you for your attention to this matter.


Ricardo C. Amaral
Author / Economist

By Ricardo C. Amaral

Ricardo C. Amaral, a frequent contributor to Brazzil, is an author and economist. He can be reached at 

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