Europe’s Dream: Escaping the dictatorship of the Dollar

Trump’s hostile behaviour is reinvigorating efforts to turn the euro into an alternative to the world’s dominant currency. If only the Europeans could find some way to do it.

Europe’s quest to find an alternative to U.S. financial dominance and the global rule of the dollar has only intensified since French and German leaders first howled about the need to recover their economic sovereignty last summer. But European governments are finding that coming up with a workable plan is a lot easier said than done—leaving them fuming but still vulnerable to Washington’s strong-arm tactics.

That doesn’t mean, however, the Europeans are going to give up trying—and that poses a long-term danger to U.S. power.

Countries such as France and Germany first bristled at the Trump administration’s decision to unilaterally pull out of the 2015 Iran nuclear deal and reimpose crippling sanctions on Iran, putting European firms squarely in the crosshairs of U.S. sanctions. America’s Iran policy still rankles, and Europe’s efforts to create a so-called special purpose vehicle to enable some trade with Iran continue, with meetings taking place this week even with oil tankers ablaze just outside the Persian Gulf.

But since the return of the Iran sanctions last year, the Trump administration has dramatically stepped up its use of sanctions and other economic weapons to force friends and foes alike to cow to its foreign-policy wishes.

In addition to a tougher line on Iran, there have been increasing, crippling sanctions on Venezuela, including a blanket prohibition on any countries providing help for Venezuela’s oil industry; further sanctions on Russian banks and individuals and repeated threats of U.S. sanctions on European firms working on a Russian gas pipeline in Germany; threats of sanctions against Turkey, a NATO ally, for its defense procurement decisions; and even an unprecedented application of 1990s-era Cuba legislation that is a direct threat to companies in Europe and elsewhere.

Trump administration

Those sanctions come on top of a slew of heavy-handed trade actions, from huge tariffs on China meant to force Beijing to change its entire economic system to a tariff threat on Mexico designed to strong-arm the country into changing its migration policies—not to mention the Trump administration’s campaign to get countries around the world to blacklist China’s Huawei, the world’s biggest telecoms equipment-maker.

All this bullying from Washington is made possible because the U.S. dollar remains the world’s reserve currency and the most used in cross-border transactions. Even so, the Trump administration is taking a risk in resorting to this financial weapon with an abandon seldom seen before, said John E. Smith, who stepped down last year as head of the U.S. Treasury Department’s sanctions arm.

“It’s of deep concern that the more the U.S. pushes Europe away from a common policy, the more they push Europe into finalizing true alternatives to the U.S. financial system,” which will ultimately weaken the United States’ economic power and its ability to effectively wield sanctions, said Smith, now the co-head of the national security group at Morrison & Foerster.

So far, adverse reaction to U.S. financial actions is boosting the euro’s prospects—a bit. “[G]rowing concerns about the impact of international trade tensions and challenges to multilateralism, including the imposition of unilateral sanctions, seem to have lent support to the euro’s global standing” over the past year, the European Central Bank (ECB) concluded Thursday in its annual report on the use of the euro.

While the euro’s share of cross-border transactions stayed about the same—just under one-third of all transactions—the euro’s share in global foreign exchange reserves grew over the last year, while the dollar dropped to its lowest level in almost 20 years. The ECB said some central banks are reducing dollar exposure due to the risk of unilateral actions.

This week, French Finance Minister Bruno Le Maire rebuffed U.S. pressure to ban Huawei, citing the need to protect French sovereignty. This month, the governor of the Banque de France and a contender to become the next head of the ECB, called for a greater role for the euro to restore Europe’s financial sovereignty. Leading French lawmakers, meanwhile, rail against U.S. extraterritorial sanctions and fret for the future of the trans-Atlantic alliance. Even Spain has fought back furiously against the U.S. revival of Cuba sanctions that threaten its leading businesses.

While the United States has aggressively used its central position in the global financial system to impose sanctions on rogue actors since the 1990s, what President Donald Trump is doing is a whole new order of magnitude, Smith said.

“The Trump administration is far more willing to confront even allies and seek to force changes to their foreign-policy position using threats of sanctions, as well as trade threats,” he said. “We’re hearing now from France and Germany what we used to hear from China and Russia.”

The problem for U.S. allies in Europe, Asia, and elsewhere that are seeking a way around U.S. financial muscle is that it is proving extremely tough to unwind more than seven decades of dollar dominance.

The U.S. financial system remains the central nervous system for the bulk of financial transactions. That gives U.S. policymakers the ability to squeeze other countries that is simply unmatched anywhere else, despite decades of sporadic efforts by countries like Japan, China, and others to make their currencies and banking systems an alternative.

U.S. sanctions

That is especially evident with Europe’s effort to sustain trade with Iran through “INSTEX,” a special financial vehicle designed to allow limited trade in humanitarian goods and medicine despite U.S. sanctions. After a year of trying, Europe and Iran still don’t have the system up and running. More to the point, however much European governments (and Brussels) would like to honour their commitments to Iran under the auspices of the 2015 accord, European businesses have a calculus of their own—and that doesn’t include taking on the U.S. Treasury.

“Companies, even Russian and Chinese companies, do what is in their best interest. And even in Russia and China, they don’t automatically subordinate that self-interest to the wishes of the government,” said Barry Eichengreen, a professor of economics and political science at the University of California, Berkeley. “For the moment, using dollars remains convenient and economical from the company point of view.”

- Foreign Policy 

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