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04 November 2018

Boosting the international role of the euro

Not having a single European bill market similar to the US' Treasury bill market may be the biggest single problem for the euro in any quest to boost its international role – and its resolution would also help the deepening of banking union by providing a safe asset for banks.

Amidst the din of Brexit, the UK may lose sight of a potentially historic shift in one of the major bulwarks of United States’ soft power – the function of the US dollar as the heart of global finance. The EU is being forced to consider a real challenge to the functions of the dollar due to the vigour of President Trump’s use of the dollar `weapon’ – against both Iran and Russia – ignoring the wishes of the EU. The rights and wrongs of the policies are a separate topic, but what matters is that the EU has decided to try and do something about it. 

In his final State of the European Union (SOTEU) speech in September, Commission President Juncker called for the euro to emerge as a genuine international currency – explicitly responding to US sanctions on Iran that started recently. Clearly, an international payments system cannot be set up in that time but it may turn out that President Trump will have forced the EU to counter the long-standing use of the US dollar’s role in international payments as a powerful instrument of US foreign policy.

Juncker laid out the geopolitical - rather than pure financial or economic - issues in emotive terms:  “It is absurd that Europe pays for 80 percent of its energy import bill – worth 300 billion euros a year – in U.S. dollars when only roughly 2 percent of our energy imports come from the United States …. It is absurd that European companies buy European planes in dollars instead of euro ….The euro must become the face and the instrument of a new, more sovereign Europe,”  

However, the core of the US power is deeply technical: the Real Time Gross Settlement (RTGS) payment system for dollars is run by the New York Federal Reserve Bank via Fedwire. Banks (US and non-US) may net customer dollar payments internally but the moment they wish to make a dollar payment to another bank, then it goes through Fedwire – on US soil and therefore subject to the full panoply of US laws. In recent years, many non-US banks have found out - via stunning fines – the `extra-territorial’ reach of US rules. [...]

Full article available for consultancy clients here

© Graham Bishop

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