The European Union (EU) reportedly plans to reduce its reliance on the US dollar-based financial system after American sanctions against Iran exposed the bloc’s weaknesses in its financial infrastructure. Officials who are now determined to question the supremacy of the dollar, the renewed desire to strengthen the role of the euro currency is partly inspired by “lessons from the Covid-19 pandemic”.
The dominance of the US dollar
In the views expressed in the European Commission’s (EC) draft strategy paper, officials warn of the current excessive reliance on the US dollar to cushion financial tension and stability risks. Prior to the recent revelations, the EU had “long sought to encourage greater use of the euro as the bloc seeks to strengthen its financial and economic autonomy”.
But as the Financial Times report says it took the negative effects of the dollar’s dominance under the Trump presidency to move EU leaders to action. This is because when the US government re-imposed sanctions on Iran, the EU financial infrastructure was also at the receiving end of the dominant power of the US dollar.
In addition, the report says that the EU leaders who seemed too eager to save them Nuclear deal with Iran were forced to “set up a special purpose vehicle (SPV) to facilitate payments for legitimate EU-Iran trade”. Even so, this SPV still ran into difficulties and this has in part spurred European leaders to act. The EC paper says:
The EU should develop measures to protect EU operators if a third country forces EU-based financial market infrastructures to comply with its unilaterally adopted sanctions.
After the United States reintroduced sanctions against Iran, its impact on European financial infrastructure was direct. For example, “Swift the Payment Messaging System, the Euroclear and Clearstream securities accounts” were affected.
Away from the dollar
Meanwhile, the EC strategy paper outlines some of the specific steps the bloc needs to take, and these include “using a planned review of EU regulation of financial benchmarks to encourage them to euro”. Many of these benchmarks are currently in US dollars.
In addition, EU policymakers want to find energy alternatives to crude oil where “the most important benchmarks like Brent and WTI are tied to the dollar”.
Ultimately, EU leaders hope that the euro’s stronger global role will “protect the economy from exchange rate shocks and reduce dependence on other currencies”.
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