Last week, German Foreign Minister Heiko Maas made international headlines by calling for the creation of a global payments system outside US control. Maas put forward the idea in response to Washington’s attempts to decouple Iran from the current system, which make it all but impossible for the European Union to meet its commitments under the Iran nuclear deal. He argued that Germany and its partners should establish a European Monetary Fund and an alternative to SWIFT, a global financial information organisation used to make cross-border payments that is Europe-based but had been pushed in the past into enforcing US sanctions.
Maas made an important point: with the US reimposing sanctions on Iran and threatening to enforce secondary sanctions on European firms and individuals that do business with the country, Europe seems to have little room to provide the financial incentives that hold the nuclear deal together. The dilemma demonstrates that, just as a measure of military might underpins any truly global trade power, a strong economic foundation is a prerequisite of an independent foreign policy.
Hence, there is nothing wrong with trying to create an alternative payment system. However, as Financial Times columnist and ECFR Council member Wolfgang Münchau rightly pointed out, such a structure is a necessary but not sufficient condition for financial independence from the US.
Europe seems to have little room to provide the financial incentives that hold the nuclear deal together
In international trade, a large share of payments involves US dollars. Moreover, to exchange euros for a third currency, one routinely has to first exchange them for US dollars. Given that payments in dollars are often routed through the US, this process allows Washington to interfere with transactions that have a marginal – if any – relationship with the country. For instance, the US was able to levy a record $8.9 billion fine on BNP Paribas (for breaking US sanctions) because it made some payments from its Geneva office to another French bank in US dollars.
Therefore, if Maas really wants Europeans to have enough clout in global economic affairs to reduce their susceptibility to American blackmail, he needs to go a step further: actively promote the euro as a key currency, with the goal of balancing the use of the euro and dollar globally. Only then could Europe easily switch to payment channels that circumvent the United States’ borders and financial system.
As Münchau pointed out, persuading people to use the euro for global transactions would require a series of changes in EU economic policymaking. They will only be willing to hold international reserves in euros if they can trust that the currency union will remain stable and relatively free of crises. Arguably, reforms of the euro area’s financial architecture have failed to create such trust. Investors would also need access to a risk-free asset denominated in euros. While German government bonds could become this asset, Germany’s constitutional debt brake severely constrains the supply of these bonds.
And there are other barriers to the euro becoming an international reserve currency. One is that this would be incompatible with Germany’s established economic model, which is based on manufacturing and exports.
Because a key currency is one that much of the world uses, there is a steady demand for holdings in the currency that grows with global income and wealth. As the Belgian-American economist Robert Triffin said of the US dollar in the 1960s, this implies that there will be permanent appreciation pressure on the currency, which in turn leads to a loss of price competitiveness in manufacturing, a trade deficit, and, ultimately, deindustrialisation. Triffin’s argument has a historical basis. When the British pound still was one of the world’s key currencies, Britain suffered from a loss of price competitiveness and a decline in its manufacturing industries. The US has experienced a similar trend since the end of the second world war.
There are other barriers to the euro becoming an international reserve currency. One is that this would be incompatible with Germany’s established economic model
This conflict between establishing an international currency and a pursuing growth model based on manufacturing exports was one of the causes of the Bundesbank’s decades-long opposition to international use of the German mark. With the German Wirtschaftswunder, international investors increasingly sought access to the mark. Yet, until the early 1980s, the Bundesbank actively discouraged the internationalisation of the German mark, as well as cross-border capital flows more broadly. Even today, German business and economic dictionaries list some of the instruments used at that time to limit cross-border capital flows – such as the Barreserve, which discouraged German firms from borrowing from abroad.
The Germans also slowed attempts to make the euro an international currency following its introduction (the French, in contrast, were much more supportive of these efforts). There is nothing wrong with rethinking this approach. Times have changed: with the values and interests of Germany and the US diverging so clearly, there may now be a greater need for European financial sovereignty. However, one needs to be aware that establishing international economic clout has severe domestic economic consequences.
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