The Buck Stops Here: Europe Seeks Alternative to U.S.-Dominated Financial System

In a sign of how serious the breach between Europe and the United States is during the Trump era, senior officials in France and Germany are increasingly planning ways to sidestep U.S. financial dominance and the global sanctions power that goes with it.

German Foreign Minister Heiko Maas late last month called for Europe to achieve financial independence from Washington as a prelude to restoring its freedom of maneuver in foreign policy, and other German officials are reportedly mulling ways to minimize U.S. dominance of the global financial system, which enables it to impose sanctions on banks and individuals almost anywhere in the world.

French Finance Minister Bruno Le Maire echoed those sentiments in a speech of his own last month, calling for the creation of “totally independent financing instruments” outside U.S. control. “I want Europe to be a sovereign continent, not a vassal,” he said.

France and Germany have proposed ideas including a greater role for the euro, an alternative global bank-payment system outside the reach of U.S. influence, or some sort of European fund that could allow continued trade with sanctioned countries regardless of opposition from Washington.

Sparking European anger is U.S. President Donald Trump’s decision this spring to pull out of the Iran nuclear deal and reimpose economic sanctions on Tehran, even though Iran was fully complying with the 2015 pact. U.S. measures include threats to sanction any European companies that do business with Iran—essentially forcing Europe to disregard its own policy on the issue.

In recent years, countries such as Russia, Venezuela, and China have all bucked at U.S. financial dominance and the sanctions power that goes with it. Russia has toyed with cryptocurrencies and its own payments system; China is taking some steps to reinvigorate the use of the renminbi as an international currency. Venezuela wants to create an oil-backed pseudo-cryptocurrency outside Washington’s reach to escape the long arm of sanctions. North Korea has also sought to use cryptocurrency to sidestep debilitating U.S. sanctions.

Now, the kind of evasive maneuvers usually employed by rogue states are being embraced by key U.S. allies—a sign that the country once relied upon to be the anchor of stability in the global system is now seen as an agent of volatility.

“Maybe there’s a different rogue country out there right now,” said Nicolas Véron, a fellow at Bruegel, a Brussels-based economic think tank.

The United States has dominated the global financial system since at least World War II. In that time, the U.S. dollar has been the world’s dominant currency, making America the linchpin of global money flows. Most countries and companies do business in dollars, and those dollars eventually flow through U.S. banks under American supervision—giving Washington the unique ability to be the world’s financial policeman.

That position has allowed the United States to sometimes abuse its power. Beginning in the 1990s, Washington began to rely more and more on financial sanctions as a key tool of foreign policy, a way to pressure regimes from Belgrade to Pyongyang without resorting to war. The use of financial sanctions only increased after the attacks of Sept. 11, 2001, and they became a go-to tool for both the George W. Bush and the Obama administrations.

But many policymakers feared that sanctions were so easy to apply that they could be overused. Jack Lew, the treasury secretary in President Barack Obama’s second term, explicitly warned about the risks of abusing U.S. sanctions muscle in a 2016 speech.

“This has been a fear of the U.S. government for decades, and critics of the sanctions tool long argued that it was being overused,” said John E. Smith, who stepped down as head of the U.S. Treasury Department’s sanctions arm, the Office of Foreign Assets Control (OFAC), this spring. That fear became acute after the United States levied sanctions on Moscow over its 2014 annexation of Crimea, sparking disputes with many countries in Europe that trade heavily with Russia.

But the breach only became manifest after the Trump administration tore up the nuclear deal this spring and threatened European companies with huge penalties—for essentially following their own government policies on doing business with Iran.

“What’s different today is that the U.S. is imposing sanctions contrary to the foreign policies not just of Russia and China, which have long chafed against the sanctions tool, but against the fundamental foreign policy of our closest allies in Europe and elsewhere,” Smith said. “That is what has brought us to this situation.”

Some see more bluster than concrete action in the recent European remarks and stress that the trans-Atlantic relationship survived previous challenges. U.S. President Dwight D. Eisenhower threatened to bankrupt Britain over the Suez Canal dispute in 1956, French Prime Minister Charles de Gaulle essentially pulled out of NATO in the early 1960s, and diplomatic scars from the 2003 Iraq War linger today.

“Europe is in a difficult place. It wants to show that it will not tolerate abuse by the current U.S. administration, and yet it also recognizes that it needs the U.S. just as the U.S. needs Europe,” said Julianne Smith, a former National Security Council official in the Obama administration. Smith said she sees more heat than light in Europe’s vague plans to build an alternative global financial system.

“At the end of the day, most policymakers understand the limits of those types of suggestions,” said Smith, now a fellow at the Robert Bosch Academy in Berlin.

Even within Germany, politicians are split. Chancellor Angela Merkel has sought to parry the thrust of her own foreign minister’s remarks about building a new financial system, warning that changes could make it easier for terrorists to wire money around the world. The Franco-German ideas have yet to secure broader buy-in from the European Union. And the political challenges that Europe would have to overcome to create a new global financial architecture to rival the current, U.S.-dominated system are hardly trivial.

Still, because the centerpiece of U.S. dominance is the central position of the dollar, it’s not impossible. Other countries have tried, and failed, to nibble at the dollar’s preeminence—especially Japan in the 1980s and China, briefly, before 2015. But the U.S. dollar has weathered previous challenges, in part because most of the world trusted Washington to be a relatively reliable and restrained financial steward, especially when it came to leveraging its financial weight to shape foreign policy. That could now be changing.

“If the United States is no longer willing to have any discipline that would support the dominance of the dollar,” there will be pushback from other countries, said Bruegel’s Véron. “It’s a matter of restraint, of not imposing sanctions on the next person you disagree with.”

And there is a plausible challenger to the dollar’s central role already out there: The euro is the second-most-important global currency, far ahead of the British pound, Japanese yen, or Chinese renminbi. To escape the long arm of U.S. sanctions, European policymakers need to find a way to grease the wheels of global business with something other than greenbacks, said Barry Eichengreen, an economist at the University of California, Berkeley.

“What Europe needs to do is to develop an alternative to the dollar that banks and others can use when engaged in cross-border transactions,” he said. “The euro isn’t in a bad position from this point of view.”

Ultimately, though, whether Europe manages to cobble together some alternative financial system to escape U.S. dominance is less important than the fact that some of Washington’s closest allies are doing the cobbling.

“The mere fact that they are talking about this is the most concerning thing to me,” said John E. Smith, the former OFAC head. “Rather than working together to solve problems, we may be at a point where our closest allies are working against us, and us against them, in one of the most important foreign-policy and national security challenges of our time.”