The European Union (EU) is reportedly planning to reduce its dependence on the US dollar-based financial system, after US sanctions against Iran exposed the vulnerability of the bloc’s financial infrastructure. According to officials, now determined to challenge the dollar’s supremacy, the renewed desire to promote the role of the euro currency is also partly inspired by ‘lessons learned from the Covid-19 pandemic’.
US dollar dominance
According to sentiments expressed in the draft document of the European Commission (EC), officials warn of the current excessive reliance “on the US dollar to dampen financial tensions and stability risks.” Prior to the latest revelations, the EU “has long sought to promote greater use of the euro as the bloc seeks to strengthen its financial and economic autonomy.”
Yet, as a Financial Times report explains, it has taken the negative consequences of the dollar’s dominance under the Trump presidency to put EU leaders into action. This was because the US infrastructure was also on the receiving end of the US dollar’s dominant force when the sanctions against Iran were reintroduced.
The report further states that EU leaders, who seemed too eager to salvage the nuclear deal with Iran, were forced to set up ” a special vehicle (SPV) to facilitate payments for legal trade between the EU and Iran. “Nevertheless, this SPV is still having problems, and that is what European leaders have begged in part to act. The EC article states:
The EU must develop measures to protect EU operators if a third country forces the EU-based financial markets infrastructure to comply with its unilaterally adopted sanctions.
After the United States again imposed sanctions on Iran, its impact on European financial infrastructure was direct. For example, “Swift the payment messaging system, the Euroclear and Clearstream securities depositors” were all affected.
Moving away from the dollar
Meanwhile, the EC policy document sets out some specific steps that the bloc should take, including the use of a planned review of EU financial regulation to encourage them to nominate in euros. ‘Many of these measures are currently denominated in US dollars.
Furthermore, EU policymakers also want to find alternatives to energy for crude oil, where “key measures such as Brent and WTI are pegged to the dollar.”
Ultimately, EU leaders hope that the stronger world role in the euro will protect the economy from currency shocks and reduce dependence on other currencies.
Do you think the EU will succeed in making the euro stronger? You can share your views in the comments section below.
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