Brussels launches new offensive against US dollar supremacy

The Commission's communication, which warns of the risks of the dollar hegemony, comes on the eve of the Inauguration Day of US President, Joe Biden. [Alyssa Pointer/EPA/EFE]

On the eve of Joe Biden’s inauguration as US president, the European Commission will launch a new offensive to promote the use of the EU’s single currency on a global level, aiming to address the vulnerabilities of financial markets, which are seen as “too reliant” on the US dollar.

The initiative will be laid down in a “communication” by the European Commission set to be adopted on Tuesday (19 January) and seen by EURACTIV.

According to the draft document, which is still subject to change, “the Commission will reach out to third-country partners to promote the use of the euro, foster the euro’s status as an international reference currency in the trade, energy and commodities sectors, and strengthen the implementation and enforcement of the EU sanctions policy.”

It is not the first time that the Commission attempts to strengthen the international role of the euro. In the aftermath of the US sanctions against Iran that also affected European companies, the EU executive concluded in 2018 that it should reduce its dependency from the dollar-based international financial system.

Juncker to propose breaking dollar’s dominance in global markets

European Commission President Jean-Claude Juncker is expected to propose today (12 September) a bigger role for the euro in international markets and more efficient decision-making in EU foreign policy in his state of the union speech, European diplomats said.

‘Open strategic autonomy’

The impact of the COVID-19 pandemic added new momentum to this priority, as the EU is seeking to strengthen its strategic autonomy in critical sectors. 

“This Communication sets out how the EU can reinforce its open strategic autonomy by promoting the international role of the euro, strengthening the EU’s financial market infrastructures, improving the implementation and enforcement of EU’s sanctions’ regimes, and increasing the EU’s resilience to the effects of the unlawful extra-territorial application of unilateral sanctions by third countries,” the document reads. 

The Commission’s fresh attempt to position the euro against the dollar comes on the eve of the inauguration of US President, Joe Biden, at a time when the EU wants to restore the transatlantic relationship following a tumultuous four-year period under Donald Trump.

EU finance ministers discussed on Monday the future of the bilateral relationship in financial and monetary affairs with former US Secretary of Treasury Larry Summers.

“Professor Summers spoke of his conviction that we are on the cusp of a new era of ‘transatlantic warmth’,” said EU economy commissioner Paolo Gentiloni after the videoconference.

“I certainly believe that there is a shared conviction in the EU and in Washington that we must seize this opportunity to relaunch and renew the transatlantic relationship after the past, often difficult years,” he added.

15 key actions 

The Commission’s communication said that the pandemic exposed the “vulnerabilities in the dollar-dominated international financial system.” 

“Global financial markets are too reliant on the US dollar to cushion financial tensions and stability risks. Falling valuations of EU companies during the crisis increased the risk of predatory takeover of some strategic EU firms, with the risk of loss of technological know-how and disruption in a number of value-chains,” the draft paper reads.

The Commission also believes that a stronger role for the euro would bring “greater systemic stability” as it diversifies the global currency regime and could reduce the shocks linked to monetary policy decisions.

In order to bolster the international role of the euro and strengthen the EU’s strategic autonomy, the EU executive proposes 15 key actions, including long-standing proposals such as completing the banking union and making progress on the capital markets union. 

The Commission insisted again on the development of euro- denominated commodity derivatives for energy and raw materials. And added that it will facilitate setting up euro-denominated benchmark indices and trading venues for new energy markets, such as hydrogen. 

As part of its offensive, the Commission will promote euro-denominated investments and facilitate the use of the euro as an invoicing and denomination currency through dialogues, workshops and surveys with financial players, regulators, institutional investors and other public and private actors. 

Regarding the international system of economic sanctions, the EU executive wants to conduct a “thorough analysis” of the EU’s vulnerabilities with regards to “unlawful extra-territorial application of unilateral sanctions by third countries”.

EU mechanism for Iran trade to be symbolically ready on 4 November

A new European Union mechanism to facilitate payments for Iranian exports should be legally in place by 4 November, when the next phase of US sanctions hit, but will not be operational until early next year, three diplomats said.

This move aims to avoid episodes like the disruption caused by the US sanctions against Iran when SWIFT decided to follow them. The Belgian-based provider of financial messaging services, a central player in cross-border payments, suspended access to its services for Iranian banks, causing serious troubles for European companies trying to interact with the country.

In addition, the Commission said it will analyse whether potential foreign takeovers of EU companies could result in the unlawful extra-territorial application of third-country sanctions.

“Such an outcome could thereby endanger the capacity of the EU target company to maintain critical infrastructure in the EU, or to ensure security and continuity of supply of critical inputs into the EU,” the document says. 

In such a case, where there’s a possible threat to the EU’s security and public order, the Commission will issue an opinion to the authorities of the member state that could block the foreign investment.

[Edited by Frédéric Simon]

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