Europe’s potential vulnerability to economic coercion increases as the euro becomes less relevant to international trade, and vice versa. For many European companies, losing access to US dollar markets means losing access to the international system of payments and trade. And the threat of market exclusion can make companies and policymakers vulnerable to blackmail. There are two underlying problems in this.
Firstly, Europeans too often discuss their monetary union and its reforms from an internal and technical perspective. They frequently fail to think about it from a geopolitical perspective – with a view not to dominate but to protect themselves from the geostrategic actions of others. They cannot protect their values and interests, including their freedom to trade, with a euro that is overshadowed by foreign currencies.
Secondly, in the realm of digital currencies, Europe has fallen behind the United States and China. Usage of the euro may soon be less attractive for businesses as a result. Digitalisation will not automatically lead to a greater role for the euro in the world, but it is an essential precondition for it. Blockchain experts estimate that digital currencies will reduce transaction costs in international trade by 20-50 per cent once they are fully in place. China is launching its digital renminbi and the American private sector is capable of launching ‘stablecoins’ such as Facebook’s Libra in a heartbeat.
Europeans should address this two-fold problem to advance the international role of the euro. Europe needs to prepare for the advent of a more multipolar and digital international currency order – even if the dollar is likely to retain its status as a global currency, and it would not be in Europeans’ interests to dethrone it.
It is essential for Europeans to understand that strengthening their currency would reduce the power imbalance between Europe and the US – which Washington has been eager to unilaterally leverage on several occasions. Europeans should avoid developing dangerous dependencies on China and its digital renminbi. They need to recognise the geopoliticaldimension of their policies on a more international euro. The creation of a euro-denominated safe asset and a more attractive monetary union would have the potential to translate into greater resilience in the new great power competition between China and the US. This is why the recent decision to allow the European Commission to raise its own debt through EU bonds on international markets comes with a significant geopolitical opportunity to enhance the euro’s attractiveness, as it will create large euro-denominated safe assets.
Europe could promote the international role of the euro in the following areas.
- Integrating foreign policy and geopolitics into Economic and Monetary Union debate: When Europeans discuss their monetary union, the capital markets union, and the banking union, they frequently think of them in terms of the technicalities of a single resolution mechanism for banks, a European single access point for investors, or an improved securitisation market. The monetary union, in this view, is a piece of the puzzle of European integration. But the union has an important geopolitical role that should be an inherent part of these discussions – one dimension of which is protection from economic coercion. The European Union will need an integrated and resilient economic architecture if it wants to play a relevant role in international affairs. Critically, the Economic and Monetary Union debate is an integral part of protecting Europe’s values and interests at home in the face of economic coercion. European negotiators should view the solidity of the monetary union and the banking union, and efforts to build a true single capital market in this way. And they should be ready to compromise for this larger goal of protecting Europe’s values and interests at home.
- Making the most of Next Generation EU: In the wake of the covid-19 crisis, the EU must reassure international investors of its credibility and reliability. The process of funding Next Generation EU, the bloc’s recovery instrument, creates an important opportunity for the European Commission to organise debt roadshows, raising awareness of the euro as a reliable and attractive currency among international investors. The EU can do so by strategically targeting investors who have not yet invested in the eurozone, an approach that has the potential to create a multiplier effect for further investment down the road.
- Public tenders for digital currency promotion: Europeans could immediately prepare tenders to build digital currencies and blockchain networks. Several initiatives, perhaps including a European Export Bank (EEB), would be perfect for initiating competition between European companies for a blockchain-based solution to payment transfers, and for creating European alternatives to the digital renminbi, as well as US competitors such as Libra. It would be possible to connect existing bank accounts to an officially supported blockchain network, exploring options for European stablecoins. This would help create much-needed European capacity in digital currencies and could simultaneously provide European businesses with a blockchain network to facilitate euro-denominated international transactions.
- Public-private agreements and incentives for specific sectors: Europeans could promote transactions in euros in sectors in which the dollar is used largely out of habit or in which the EU is a critical trade partner. Some countries (such as Russia) will be keener to de-dollarise European trade than others, given their strategic and commercial objectives.
- Sectoral task forces: The EU and its member states could systematically assess which sectors could benefit from a decrease in transaction costs through the use of the euro (or, at least, would not expect significant increases in doing so), along with areas in which the financial ecosystem is mostly European; in which rating agencies have no bias; and in which liabilities do not impose prohibitive risks on businesses. Europeans could then bring together key stakeholders from these sectors in a task force to create a strategy for a transition to more trade in euros.
- In sectors that meet all these conditions (such as aviation), Europe could create task forces composed of producers, banks, rating agencies, and public sector bodies to work out concrete steps for greater use of the euro within a relatively short amount of time. The need to renew European airline fleets in line with climate policy – in which the euro could be the sole transaction currency – would be a good fit for this.
- Commodities: The EU and its member states could leverage their position as major buyers to negotiate better conditions to trade commodities. For instance, EU states rank among some of the largest importers of Russian gas, Russian oil, and Turkish steel.
These ideas represent opportunities but also come with challenges. Europeans would need to address the following issues.
- Competition outside Europe: Increased trading in the euro might split the market into dollar- and euro-denominated transactions, increasing arbitrage opportunities and raising transactions costs.
- EU divisions: Debates on how to bolster the Economic and Monetary Union can divide EU member states. This is why it is important for Europeans to integrate foreign policy and geopolitical thinking into these discussions.
- Lack of impact: There is no guarantee that bringing together public and private stakeholders in sectoral task forces, public tenders for digital currencies, or even agreeing to euro usage in a given sector would translate into significant structural changes in international usage of the euro.
- Reassuring investors: Institutional and international investors could see any policy other than a fiscal union for the eurozone as insufficient and non-structural, casting doubt on the euro’s attractiveness.
- Risks of substitution effects: Temporary measures such as the EU recovery fund might not lead to greater euro liquidity, as the European Central Bank’s bond-purchasing programme could absorb a good part of the fund’s effect and investors might merely substitute euro-denominated assets for Next Generation EU ones.
- Strategic hedging: Building an EEB comes with its own problems. Third parties might view European experiments with stablecoins as relatively unattractive if these currencies were connected to the EEB. Europe could prepare the public tender independently from EEB efforts.
This paper is a product of the European Council Foreign Relations’ work and the opinions expressed in it those of the individual authors. This tool, as part of ECFR’s toolbox, presents ideas for the European debate. It is based on a systematic consultation exercise that engaged with high-level public and private actors, mainly those from Germany and France. ECFR’s Task Force for Protecting Europe from Economic Coercion worked on these proposals during 2020. Members of the task force discussed a range of possible responses to extraterritorial coercion and grave violations of sovereignty through economic measures. The papers do not reflect a consensus of the task force. The authors of the papers took into account how participants from diverse backgrounds in the public, economic, and financial sectors, and academia, collectively viewed opportunities and challenges on each instrument.
The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of its individual authors.