The European Union (EU) is planning to reduce its dependence on the US dollar-based financial system after US sanctions on Iran exposed the vulnerabilities of the bloc’s financial infrastructure. According to officials, who are now determined to challenge the dollar’s supremacy, the renewed desire to boost the role of the euro currency is also partly inspired by “lessons learned from the Covid-19 pandemic”.
The domination of the US dollar
In sentiments expressed in the draft European Commission (EC) policy document, the authorities warn of the current overconfidence “in the US dollar to ease financial tensions and stability risks” Before the latest disclosures, the EU had “sought to promote greater use of the euro while the bloc tries to strengthen its financial and economic autonomy ”.
However, as a Financial Times report explains, it took the negative effects of the dollar’s dominance under Trump’s presidency to push EU leaders into action. That’s because when the United States government again imposed sanctions on Iran, the EU’s financial infrastructure was also receiving the dominant power of the dollar.
In addition, the report states that EU leaders, who seemed very eager to save the nuclear deal with Iran, were forced to “create a special purpose vehicle (SPV) to facilitate payments for legitimate trade between the EU and the Will”. However, this SPV still encountered difficulties and this is what partly prompted European leaders to act. The EC document says:
The EU should develop measures to protect EU operators in the event that a third country compels EU-based financial market infrastructures to comply with unilaterally adopted sanctions.
After the United States reintroduced sanctions on Iran, its impact on European financial infrastructure was direct. For example, “the Swift payment messaging system, Euroclear and Clearstream securities depositories” have all been affected.
Moving away from the dollar
In the meantime, the EC policy document outlines some of the specific steps the bloc needs to take, and these “include the use of a planned review of EU financial reference regulations to encourage them to be denominated in euros”. Many of these benchmarks are currently denominated in US dollars.
In addition, EU lawmakers also want to find energy alternatives to crude oil, where “key benchmarks, like Brent and WTI, are pegged to the dollar”.
In the end, EU leaders hope the euro’s stronger global role “will protect the economy from currency shocks and reduce dependence on other currencies”
Do you think the EU will be able to make the euro stronger? You can share your opinions in the comments section below.
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