Europe Drifts Away as its US Bogeyman Prepares to Leave

Tired of dancing to an American tune, the European Commission is ready to challenge the global supremacy of the US dollar. Next week, the commission will likely adopt a policy paper aiming to strengthen the euro by lessening the continent’s dependence on dollar-denominated trade and finance.

The bloc’s executive arm proposes a review of financial benchmark regulation to encourage the use of its own currency. The commission also wants to promote the use of euros in commodity trading, specifically on the natural gas and hydrogen exchanges emerging in Amsterdam where most contracts are already being denominated in euros.

The policy paper under discussion recommends reducing the union’s dependence on non-EU investment banks which – it notes – in times of financial crisis may prefer to focus on their domestic markets. Following this logic, the paper emphasises the need to replicate parts of the UK’s financial market infrastructure in to lessen the EU’s dependence on London clearinghouses and strengthen the euro.

Whilst the goals set out by the commission are imminently reasonable, and even sensible, the policy paper on the global role of the euro ignores one of the root causes of the dollar’s continued supremacy: the outsized current account deficit sustained by the US. The world is happy to accumulate dollars, freshly minted to cover the almost ever-widening payments deficit. This creates a vast pool of liquid assets that are used for trade and investments worldwide. Conversely, the European Union consistently runs a sizeable current account surplus, essentially accumulating dollars, limiting the volume of euro assets held outside the EU, and precluding the euro’s use as a global reserve currency.

However, it was the extraterritorial application of US law and policy under the Trump Administration that caused considerable irritation in European capitals. President Trump’s snap decision, in May 2018, to rescind the Iran nuclear deal and reimpose sanctions, was seen as a direct challenge to the EU which reacted with a dismay that quickly turned to anger. That same month, in open rebellion against US hegemony, the European Commission instructed the European Investment Bank (EIB) to facilitate investments in Iran. The commission also declared the US sanctions ‘illegal’ and forbade companies and private citizens from complying with them. A special purpose vehicle was duly set up to finance trade with Iran after the US managed to exclude the country from the Swift payment messaging network and the Euroclear and Clearstream securities depositories.

The euro policy paper specifically seeks to develop a regulatory framework that shields EU-based economic actors from interference by third countries. Speaking to the Financial Times, a Brussels official indicated that the initiative is meant to redefine the EU’s ‘place in the world’ by giving it the means to become a financial and economic power commensurate with the ‘bloc’s heft’.

Coming on the eve of Mr Biden’s inauguration, the policy paper represents clear proof of the lasting damage wrought by the Trump Administration. Its unilateral actions, and blunt wielding of US power, have highlighted the need to boost the strategic autonomy of the EU to replace the entente that has provided the basis of transatlantic cooperation for well over fifty years.

Though the EU is willing, and even eager, to rebuild the bridges burnt by the Trump Administration, the commission also seems determined to steer a course independent of Washington. The recently signed China-EU investment deal is an example of that, as is the commission’s refusal to stop its backing of Germany in its dispute with the US over Nord Stream 2, the undersea pipeline that links Vyborg in Russian Karelia with Lubmin in Germany from where the natural gas it transports is injected into the European distribution network. The US fears that the second pipeline crossing the Baltic Sea may yet give a strategic edge to an ‘expansionist’ Russia which not only gains a money spinner but a stranglehold over Europe’s energy supply as well. Germany counters that mutual interests cancel this threat and that the US merely tries to carve out a lucrative market for its own natural gas.

The message Brussels sends Mr Biden as he prepares to move into the White House is a rather simple one: the EU welcomes the new administration but has since moved on and is not prepared to fully trust the US to show consideration and engagement any time soon.