Europe takes aim at greenback
The European Union is aiming to challenge the greenback’s dominance in global markets, as it seeks to strengthen the international role of its currency and become more independent of the US.
The EU must develop “a full range of trustworthy interest rate benchmarks” in financial markets, and a fully integrated instant payment system, according to a draft set of initiatives from the European Commission.
The commission’s plans are aimed at reducing the so-called “exorbitant privilege” of the US dollar, which allows Washington to force global compliance with its foreign policy goals, including by the EU.
“There is scope for the euro to develop further its global role and achieve its full potential, reflecting the euro area’s political, economic and financial weight,” says the commission’s draft
The proposed measures include using the euro as default currency in energy contracts between EU members and other countries, as well as the creation of euro-denominated price benchmarks for crude oil.
According to a separate memo obtained by Bloomberg, the commission’s recommendations will reduce the risk of “disruption of energy supplies” due to the actions of “third countries”.
The commission will also seek to make hedging transactions in euros more attractive. This could be achieved by requiring a greater number of contracts to be cleared through central counterparties, it said.
Finalising the reform of scandalridden financial benchmarks could also help “increase the attractiveness of trading and pricing eurodenominated instruments,” the commission said.
On top of that, officials will help to foster “a fully integrated instant payment system” to reduce reliance on foreign providers of card and online payments, it said.
The commission’s efforts to develop the euro’s international role reflect growing calls in countries such as France and Germany for the EU to also adopt tools that will allow it to pursue its foreign-policy goals with less recourse to an unpredictable US ally.
“Recent extraterritorial unilateral actions by third country jurisdictions like in the case of re-imposed sanctions on Iran, together with recent challenges to the international rules-based governance and trade are a wake-up call regarding Europe’s economic and monetary sovereignty.”
The EU is the world’s largest importer of energy, as its annual import bill averages more than ¤300 billion ($491b) per year, according to the memo.
A euro-denominated reference oil contract “could be used as an underlying asset for financial contracts, such as derivatives, that provide the necessary risk management tools for market participants,” according to the draft.
The pricing could be based either on existing production fields in the European Economic Area, or matched to physical properties in a “typical” barrel in the EU crude oil import basket.
The proposals also include European bodies and mechanisms increasing their share of euro-denominated debt and providing technical assistance to companies in Africa and the EU’s neighbours, and supporting them in adopting the euro as their payment currency.
The plans come in parallel with ongoing discussions on how to set up a so-called special purpose vehicle that will facilitate payments, including for Iranian oil.
Allowing transactions with Iran to go through — even as the EU’s lending arm, the European Investment Bank, has exposure to the US, making it more difficult to act as a financing channel — will help the EU economy and businesses grow more independent from the dollar and the US economy, officials say.
Still, efforts to set up such a vehicle are facing several unresolved issues, including finding a location for the operation and a way to reassure banks interacting with it that they will be shielded from the risk of being excluded from financial markets in the US.