Europe’s Dream: Escaping the Dictatorship of the Dollar

Europe’s quest to find an alternative to U.S. financial dominance and the global rule of the dollar has only intensified since French and German leaders first howled about the need to recover their economic sovereignty last summer. But European governments are finding that coming up with a workable plan is a lot easier said than done—leaving them fuming but still vulnerable to Washington’s strong-arm tactics.

That doesn’t mean, however, the Europeans are going to give up trying—and that poses a long-term danger to U.S. power.

Countries such as France and Germany first bristled at the Trump administration’s decision to unilaterally pull out of the 2015 Iran nuclear deal and reimpose crippling sanctions on Iran, putting European firms squarely in the crosshairs of U.S. sanctions. America’s Iran policy still rankles, and Europe’s efforts to create a so-called special purpose vehicle to enable some trade with Iran continue, with meetings taking place this week even with oil tankers ablaze just outside the Persian Gulf.

But since the return of the Iran sanctions last year, the Trump administration has dramatically stepped up its use of sanctions and other economic weapons to force friends and foes alike to cow to its foreign-policy wishes.

In addition to a tougher line on Iran, there have been increasing, crippling sanctions on Venezuela, including a blanket prohibition on any countries providing help for Venezuela’s oil industry; further sanctions on Russian banks and individuals and repeated threats of U.S. sanctions on European firms working on a Russian gas pipeline in Germany; threats of sanctions against Turkey, a NATO ally, for its defense procurement decisions; and even an unprecedented application of 1990s-era Cuba legislation that is a direct threat to companies in Europe and elsewhere.

Those sanctions come on top of a slew of heavy-handed trade actions, from huge tariffs on China meant to force Beijing to change its entire economic system to a tariff threat on Mexico designed to strong-arm the country into changing its migration policies—not to mention the Trump administration’s campaign to get countries around the world to blacklist China’s Huawei, the world’s biggest telecoms equipment-maker.

All this bullying from Washington is made possible because the U.S. dollar remains the world’s reserve currency and the most used in cross-border transactions. Even so, the Trump administration is taking a risk in resorting to this financial weapon with an abandon seldom seen before, said John E. Smith, who stepped down last year as head of the U.S. Treasury Department’s sanctions arm.

“It’s of deep concern that the more the U.S. pushes Europe away from a common policy, the more they push Europe into finalizing true alternatives to the U.S. financial system,” which will ultimately weaken the United States’ economic power and its ability to effectively wield sanctions, said Smith, now the co-head of the national security group at Morrison & Foerster.

So far, adverse reaction to U.S. financial actions is boosting the euro’s prospects—a bit. “[G]rowing concerns about the impact of international trade tensions and challenges to multilateralism, including the imposition of unilateral sanctions, seem to have lent support to the euro’s global standing” over the past year, the European Central Bank (ECB) concluded Thursday in its annual report on the use of the euro.

While the euro’s share of cross-border transactions stayed about the same—just under one-third of all transactions—the euro’s share in global foreign exchange reserves grew over the last year, while the dollar dropped to its lowest level in almost 20 years. The ECB said some central banks are reducing dollar exposure due to the risk of unilateral actions.

This week, French Finance Minister Bruno Le Maire rebuffed U.S. pressure to ban Huawei, citing the need to protect French sovereignty. This month, the governor of the Banque de France and a contender to become the next head of the ECB, called for a greater role for the euro to restore Europe’s financial sovereignty. Leading French lawmakers, meanwhile, rail against U.S. extraterritorial sanctions and fret for the future of the trans-Atlantic alliance. Even Spain has fought back furiously against the U.S. revival of Cuba sanctions that threaten its leading businesses.

While the United States has aggressively used its central position in the global financial system to impose sanctions on rogue actors since the 1990s, what President Donald Trump is doing is a whole new order of magnitude, Smith said.

“The Trump administration is far more willing to confront even allies and seek to force changes to their foreign-policy position using threats of sanctions, as well as trade threats,” he said. “We’re hearing now from France and Germany what we used to hear from China and Russia.”

The problem for U.S. allies in Europe, Asia, and elsewhere that are seeking a way around U.S. financial muscle is that it is proving extremely tough to unwind more than seven decades of dollar dominance. The U.S. financial system remains the central nervous system for the bulk of financial transactions. That gives U.S. policymakers the ability to squeeze other countries that is simply unmatched anywhere else, despite decades of sporadic efforts by countries like Japan, China, and others to make their currencies and banking systems an alternative.

That is especially evident with Europe’s effort to sustain trade with Iran through “INSTEX,” a special financial vehicle designed to allow limited trade in humanitarian goods and medicine despite U.S. sanctions. After a year of trying, Europe and Iran still don’t have the system up and running. More to the point, however much European governments (and Brussels) would like to honor their commitments to Iran under the auspices of the 2015 accord, European businesses have a calculus of their own—and that doesn’t include taking on the U.S. Treasury.

“Companies, even Russian and Chinese companies, do what is in their best interest. And even in Russia and China, they don’t automatically subordinate that self-interest to the wishes of the government,” said Barry Eichengreen, a professor of economics and political science at the University of California, Berkeley. “For the moment, using dollars remains convenient and economical from the company point of view.”

That’s one reason why since last year the European Union has been redoubling efforts to carve out a greater international role for the euro, the world’s second-most important currency.

Last fall, European Commission President Jean-Claude Juncker called for deeper economic and monetary reforms to boost the euro’s role in the global economy, which would help shield Europe from “selfish unilateralism” by others. “The euro must become the face and the instrument of a new, more sovereign Europe,” Juncker said.

Late last year, the European Commission rolled out a road map to strengthen the euro’s international role, including completing true monetary union 20 years after the launch of the European currency by creating real pan-European banking and capital markets, which remain fragmented along national lines. Another key plank is to use the euro more, and the dollar less, in the energy sector; despite being the biggest energy importer in the world, Europe mostly pays in dollars for oil, coal, and natural gas.

This week, the commission reported that consultations with a wide range of industries showed “broad support for reducing dependence on a single dominant global currency” and “recognition that the EU, through the euro, can reinforce its economic sovereignty.” The euro, the commission found, is the only currency that can realistically compete with the dollar.

But Europe is still struggling to make its own money the currency of choice for seemingly logical things, such as the 300 billion euros the continent spends every year importing energy—the overwhelming share of which is actually paid for in dollars, which go through U.S. banks under the eye of U.S. authorities. And European Commission officials stress that a lot more progress must be made on creating the European monetary and banking union, and especially a true pan-European capital market, to better be able to compete with the dollar and U.S. financial might.

“What’s holding the euro back? National financial markets in Europe still lack the breadth and liquidity of U.S. financial markets because they’re segmented along national lines,” Eichengreen said. Still, he said, “Rome wasn’t built in a day. These pilot projects augur what is to come. It will just take time to get there.”

The United States and Europe have had plenty of deep-seated economic spats before, from disputes over trade and monetary policy in the 1970s to decades-long fights over agriculture, industrial subsidies, and tariffs. But America’s recent insistence on using its financial might to strong-arm even its closest allies into doing its bidding is a whole new ballgame—with potentially lasting consequences, Smith said.

“The United States has pushed Europe on this issue to the breaking point, where capitals across Europe are looking for alternatives, and at some point some of those alternatives will bear fruit.”