In Europe, a grow­ing push to es­cape the shadow of the U.S.

The Ger­man for­eign min­is­ter's bold de­mand to cre­ate in­de­pen­dent fi­nan­cial and de­fence mech­a­nisms will lend greater po­lit­i­cal weight to France's ear­lier call to re­claim Europe's sovereignty from the United States.

Financial Nigeria Magazine - - Contents -

On Aug. 21, Ger­man For­eign Min­is­ter Heiko Maas took to Ger­man daily Han­dels­blatt to pen a can­did op-ed that boldly called on Europe to re-eval­u­ate the trans-At­lantic part­ner­ship and bol­ster its own au­ton­omy in response to U.S. uni­lat­er­al­ism. Maas, a mem­ber of the So­cial Demo­cratic Party (the ju­nior part­ner in Ger­many's rul­ing coali­tion) dis­missed pol­icy pre­scrip­tions that sim­ply ad­vise Europe to wait out the Don­ald Trump pres­i­dency. In­stead, he ar­gued that the forces that have led to the chasm in the trans-At­lantic re­la­tion­ship have been long in the mak­ing and that a more strate­gic ap­proach to re­bal­ance the re­la­tion­ship is re­quired. Specif­i­cally, Maas called for a sep­a­rate pay­ment sys­tem to SWIFT (a Brus­sels-based com­pany that fa­cil­i­tates global fi­nan­cial trans­ac­tions) that would be in­su­lated from U.S. se­condary sanc­tions. He also pro­posed a Euro­pean Mon­e­tary Fund (EMF) that would act in­de­pen­dently of the In­ter­na­tional Mon­e­tary Fund (IMF), as well as a Euro­pean Se­cu­rity and De­fence Union – since Euro­pean mem­bers of NATO "can­not rely on Wash­ing­ton" as much as they used to.

The Big Pic­ture

Strat­for's third-quar­ter forecast stated that U.S. tar­iffs and uni­lat­eral sanc­tions would spur Europe to re­claim its eco­nomic sovereignty from the United States. This is a slow-mov­ing trend, but the Trump ad­min­is­tra­tion's ac­tions are serv­ing to widen the trans-At­lantic di­vide – some­thing that will have se­ri­ous long-term con­se­quences for every­thing from NATO’s evo­lu­tion to the fu­ture of the global fi­nan­cial sys­tem.

Maas' pro­pos­als prompted a more cau­tious and nu­anced response from his boss, An­gela

Merkel. The Ger­man chan­cel­lor stressed the ne­ces­sity of main­tain­ing good se­cu­rity co­op­er­a­tion with the United States and the great im­por­tance of SWIFT, even as she ac­knowl­edged the prob­lems the Euro­pean Union is fac­ing with the United States as Brus­sels seeks to con­tinue con­duct­ing fi­nan­cial trans­ac­tions with Iran. Merkel's cau­tion un­der­stand­ably stems from her tense re­la­tion­ship with the White House and pend­ing trade ne­go­ti­a­tions with Wash­ing­ton, dur­ing which she will aim to neu­tral­ize a U.S. threat to im­pose auto tar­iffs on the Euro­pean Union – a de­vel­op­ment that would par­tic­u­larly hurt Ger­many. Nonethe­less, the chan­cel­lor en­dorsed Maas' over­ar­ch­ing mes­sage, de­scrib­ing it as "an im­por­tant con­tri­bu­tion as it ex­presses in other words what I have said, that the trans-At­lantic re­la­tion­ship is chang­ing, we need to take more re­spon­si­bil­ity, Europe has to take its fate into its own hands."

A Euro­pean push for greater au­ton­omy was bound to re­sult from an in­ten­si­fy­ing wave of U.S. uni­lat­er­al­ism on tar­iff pol­icy and se­condary sanc­tions, as well as U.S. quar­rels with Euro­pean part­ners over de­fence and en­ergy mat­ters. In May, French Econ­omy Min­is­ter Bruno Le Maire ar­gued that Europe needs to re­claim its "eco­nomic sovereignty" af­ter Wash­ing­ton with­drew from the Iran nu­clear agree­ment. Ger­many's voice adds con­sid­er­able fire­power to this broader ap­peal.

The Path to Part­ing Ways

In prac­tice, greater Euro­pean au­ton­omy can as­sume sev­eral forms. On de­fence mat­ters, France is al­ready lead­ing the way in its at­tempts to strengthen the Con­ti­nent's strate­gic au­ton­omy through de­fence co­op­er­a­tion pacts. Such ini­tia­tives in­clude the Per­ma­nent Struc­tured Co­op­er­a­tion agree­ment (PESCO) for the de­vel­op­ment of joint de­fence ca­pa­bil­i­ties, as well as the Euro­pean In­ter­ven­tion Ini­tia­tive, which is de­signed to in­crease Europe's abil­ity to project force abroad side-by-side with non­mem­ber coun­tries, as well as non-NATO mem­bers. While these ini­tia­tives pre­date the Trump pres­i­dency and ad­dress long­stand­ing chal­lenges of how to pool EU re­sources and in­crease ef­fi­ciency across the bloc's mil­i­taries, France's pro­pos­als have gained mo­men­tum thanks to Trump's open quar­rels with the NATO al­liance.

On eco­nomic mat­ters, the Greek fi­nan­cial cri­sis spurred the Euro­pean Union to lessen its de­pen­dence on the IMF, in which the United States car­ries sig­nif­i­cant in­flu­ence. In­stead, Europe seeks to de­velop its own bailout mech­a­nism through the Euro­pean Sta­bil­ity Mech­a­nism. Paris wishes to take mat­ters a step fur­ther by cre­at­ing a new en­tity that would give the bloc greater fi­nan­cial fire­power and more dis­cre­tion in de­sign­ing as­sis­tance pro­grams for coun­tries in dis­tress. But the pro­posal for an EMF has trig­gered unease in more fis­cally strin­gent coun­tries such as Ger­many – a coun­try that is wary of cre­at­ing a "trans­fer union" in which large fis­cal trans­fers would flow from north to south. In con­trast, Ber­lin wishes to en­sure that any such fund has strong tech­no­cratic en­force­ment mech­a­nisms. The Ger­manFrench de­bate over gov­ern­ing the EMF is a reminder of the in­ter­nal di­vi­sions with which the union must still con­tend, even as it feels more em­bold­ened to band to­gether in de­fi­ance of the United States.

At­tempt­ing to pre­serve its eco­nomic ties to Iran in the face of U.S. se­condary sanc­tions, the union im­posed a block­ing statute on Aug. 7 to ban EU com­pa­nies from com­ply­ing with U.S. de­mands to sever ties with Iran. Le Maire also called for a Euro­pean agency that would mir­ror the func­tions of the United States' Of­fice of For­eign As­sets Con­trol to in­de­pen­dently track whether Euro­pean com­pa­nies are com­ply­ing with sanc­tions. The block­ing statute, how­ever, is largely sym­bolic, be­cause any U.S. fines im­posed on EU com­pa­nies for trad­ing with Iran would likely ex­ceed the penal­ties stip­u­lated by the statute. Most pri­vate com­pa­nies will thus limit their busi­ness with Iran and rely on loop­holes within the EU le­gal text to in­su­late them­selves from both U.S. and EU puni­tive mea­sures.

The Blockchain Al­ter­na­tive

Per­haps more sig­nif­i­cant is Maas' call for an in­de­pen­dent pay­ment sys­tem to in­su­late Europe from U.S. se­condary sanc­tions. Wash­ing­ton has threat­ened to side­line Iran from SWIFT as part of its max­i­mum-pres­sure tac­tics to iso­late Tehran from the global fi­nan­cial sys­tem. SWIFT, how­ever, is a Bel­gium-based pri­vate com­pany sub­ject to EU laws, and Europe's present lead­ers largely op­pose any new ac­tions against the Is­lamic re­pub­lic's banks, un­like their de­ci­sion to par­tic­i­pate in sanc­tions against Tehran six years ago. The United States could still try to sanc­tion in­di­vid­ual board mem­bers of SWIFT to pun­ish the com­pany for non­com­pli­ance, but this could harm a crit­i­cal artery of the global fi­nan­cial sys­tem – not to men­tion ig­nite a se­ri­ous diplo­matic cri­sis with the Euro­pean Union.

But a mere U.S. threat to that ef­fect could spur the bloc to ex­pand the scope of ex­ist­ing Euro­pean-cen­tric pay­ment and set­tle­ment sys­tems like TARGET2 to pre­serve its fi­nan­cial ties with coun­tries like Iran. Far more con­se­quen­tial in the long term would be a Euro­pean move to team up with other ma­jor pow­ers, such as China and Rus­sia, on global fi­nan­cial re­form pro­pos­als that in­clude the adop­tion of a global blockchain-based fi­nan­cial pay­ment sys­tem. Pri­vate banks the world over are al­ready ex­per­i­ment­ing with the tech­nol­ogy as a way to im­prove ef­fi­ciency, en­hance se­cu­rity and re­duce the cost of cross-border trans­ac­tion fees. Among the many im­pli­ca­tions of such a sys­tem is the di­min­ished abil­ity of any one player, such as the United States, to fi­nan­cially in­su­late a coun­try through se­condary sanc­tions. The pre-emi­nence of the dol­lar as a re­serve cur­rency could also slowly erode over time in such a sys­tem, which would greatly fa­cil­i­tate the trad­ing of other cur­ren­cies.

To be clear, it would take years for such a global fi­nan­cial pay­ments sys­tem to reach scal­able vi­a­bil­ity, and even then, a thorny reg­u­la­tory maze awaits. Nonethe­less, the shorter-term geopo­lit­i­cal cat­a­lysts that are driv­ing a ma­jor global pil­lar like Europe to­ward re­claim­ing eco­nomic sovereignty could play an im­por­tant role in slowly carv­ing out a new – and far more dis­rup­tive – re­al­ity for the in­ter­na­tional sys­tem.

“In Europe, a Grow­ing Push To Es­cape the Shadow of the U.S.” is re­pub­lished un­der con­tent con­fed­er­a­tion be­tween Fi­nan­cial Nige­ria and Strat­for.

At­tempt­ing to pre­serve its eco­nomic ties to Iran in the face of U.S. se­condary sanc­tions, the union im­posed a block­ing statute on Aug. 7 to ban EU com­pa­nies from com­ply­ing with

U.S. de­mands to sever ties with Iran.

Cen­ter of Pic­ture: Ger­man Chan­cel­lor An­gela Merkel and French Pres­i­dent Em­manuel Macron

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