The omnipotent dollar: US sanctions and the euro problem

Last week, European heads of state and government moved to protect European companies that do business with Iran from US sanctions. In this, they have the law on their side. Under the Iran nuclear deal signed in 2015, Western companies are allowed to do business with Iran in return for the country’s suspension of much of its nuclear programme and submission to a stringent inspection regime. The UN Security Council has approved the deal. All signatories, except the United States, abide by the agreement’s terms.

Europe’s activation of a blocking statute that limits the scope of US sanctions, or its introduction of credit financing through the European Investment Bank, may provide some temporary relief. But, in the long run, such efforts will not be enough. The way that US President Donald Trump has turned his back on the Iran deal, without any consideration for America’s European allies, fits perfectly into a new era of geo-economics – one in which both states and non-state actors use economic instruments to wage geopolitical battles. In this era, countries increasingly try to force their opponents to capitulate by harnessing the infrastructure of the global economy. Russian President Vladimir Putin weaponises gas supplies and exploits cyberspace. Turkish President Recep Tayyip Erdogan uses the free movement of people – specifically, refugees – to blackmail the European Union. Trump slaps tariffs and sanctions on his allies. Much of the post-war, rules-based multilateral system is being dismantled.

The euro is the world’s second reserve currency. But few global financial transactions are made in euros.

The EU is an economic giant. It should be able to weather these geo-economic battles. For years, war-averse Europeans have used economic power to influence the world. Due to the enormous weight of the European internal market, faraway companies feel compelled to adopt European regulatory standards. The EU frequently uses sanctions as a political tool, and links development aid to political and social reform. But Europe has one phenomenal weakness: in monetary terms, it is a non-entity. Internationally, it more or less permanently punches beneath its weight.

Why can America, in contravention of international law and agreements with transatlantic friends, so easily destroy European companies if it wants to? The answer is simple: because the world economy revolves around the dollar. According to the Bank for International Settlements, in 2016, 88 percent of global financial transactions were made in dollars. As the world’s reserve currency, the dollar is hard-wired to the global economy. When one company pays another in a transaction involving multiple currencies, it almost always does so through a financial institution that uses the dollar – making all involved vulnerable to political whims in Washington. Admittedly, the euro is the world’s second reserve currency. But few global financial transactions are made in euros. Because almost all banks worldwide trade in dollars, they will avoid customers who have anything to do with Iran as a precaution against US sanctions. No Security Council resolution will protect them against these measures.

This leaves Europe with two options. Either it accepts that the Iran deal is broken and bends to the omnipotence of the greenback. Or it keeps fighting for a fair multilateral, rules-based system while trying to block Trump’s brutal, unpredictable display of geo-economic power. If the Europeans choose the latter, they must strengthen the euro. France and Italy have always seen the euro as a vehicle for enhancing Europe’s international role, and for tempering American hegemony by claiming a larger role for themselves on the world stage. Indeed, in the 1950s, French politician Jacques Rueff said: “ Europe shall be made through the currency, or it shall not be made.” But Germany hates displays of power and only wants to talk about one thing: price stability. The Netherlands and other frugal northern eurozone countries support this position.

Europeans can provide the Euro with a stronger shared foundation using Eurobonds, a European deposit insurance scheme, and majority decision-making in the Eurogroup. No one will swap the dollar for the euro if the latter’s stability continues to rest on shaky bilateral loans, mantras such as “every country should hold up its own pants,” and the hope that no national parliamentarian will block emergency loans in the midst of a crisis. Europeans who refuse to correct these weaknesses have no right to complain about President Trump’s mercantilist decisions.

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.


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