EU pro­poses wider euro use

US with­drawal from the Iran nu­clear deal prompts Eu­ro­pean Com­mis­sion to sug­gest com­pa­nies and states in­crease use of cur­rency

Business Day - - FRONT PAGE - Francesco Guaras­cio Brus­sels Reuters

The Eu­ro­pean Com­mis­sion pub­lished on Wed­nes­day non­bind­ing pro­pos­als to boost the role of the euro in in­ter­na­tional pay­ments and its use as a re­serve cur­rency to chal­lenge the US dol­lar.

The Eu­ro­pean Com­mis­sion pub­lished on Wed­nes­day non­bind­ing pro­pos­als to boost the role of the euro in in­ter­na­tional pay­ments and its use as a re­serve cur­rency to chal­lenge the dom­i­nance of the dol­lar.

The move fol­lows the de­ci­sion by the US to with­draw from an agree­ment with Iran on its nu­clear pro­gramme. That has forced many Eu­ro­pean com­pa­nies to stop trad­ing with Iran to avoid US sanc­tions.

The Eu­ro­pean Com­mis­sion called on com­pa­nies and states to in­crease their use of the euro in en­ergy con­tracts. It said it would study pos­si­ble mea­sures to pro­mote the cur­rency in fi­nan­cial and com­mod­ity mar­kets. “The de­ci­sion to use a cur­rency is ul­ti­mately made by mar­ket par­tic­i­pants,” the com­mis­sion ac­knowl­edged.

The most ef­fec­tive way to widen the euro’s in­ter­na­tional role was to over­haul the 19coun­try cur­rency union and adopt fi­nan­cial re­forms that have been blocked for years by con­flict­ing na­tional in­ter­ests.

In the 20 years since its adop­tion, the euro’s in­ter­na­tional role reached its peak at the be­gin­ning of the past decade. Its use dropped dur­ing the 2007/08 fi­nan­cial cri­sis.

The euro has not re­cov­ered, and the dol­lar re­mains the most used cur­rency. About 60% of sov­er­eign debt is­suance and global for­eign ex­change re­serves are in dol­lars.

The euro is the sec­ond­largest cur­rency, but its share of each mar­ket is just 20%.

The com­mis­sion ad­mit­ted the dol­lar dom­i­nance was due to higher liq­uid­ity, lower trans­ac­tion costs and its use as a bench­mark in com­modi­ties and de­riv­a­tives mar­kets pre­rog­a­tives that can hardly be chal­lenged in the short term. But it ar­gued that a stronger euro would be pos­i­tive not only for Europe but also for the wider world, which “would help im­prove the re­silience of the in­ter­na­tional fi­nan­cial sys­tem”.

“More than pro­mo­tion, you need re­forms, sta­bil­ity and con­vinc­ing in­vestors,” a se­nior cen­tral banker said, air­ing wide­spread doubts at the Eu­ro­pean Cen­tral Bank (ECB), the body in charge of the euro, over the com­mis­sion’s plan.

How­ever, re­cent trade con­flicts and the use of the dol­lar as an in­stru­ment to force sanc­tions on Iran have raised con­cern in other coun­tries about the US cur­rency. That could con­trib­ute to a stronger role of the euro, EU of­fi­cials ad­mit.

The com­mis­sion pushed for strength­en­ing the euro’s role in in­ter­na­tional pay­ments, where it holds a global share sim­i­lar to the dol­lar, more than 35%.

The EU is the world’s largest en­ergy im­porter with an av­er­age im­port bill of €300bn, the com­mis­sion said, urg­ing EU states to switch to a de­fault use of the euro in fu­ture en­ergy in­ter­na­tional agree­ments.

It said it would also con­sider moves to in­crease the use of the euro by air­craft man­u­fac­tur­ers, such as France-based Air­bus, and in com­modi­ties mar­kets.

In the fi­nan­cial sec­tor, the EU ex­ec­u­tive said it could pro­pose ex­tend­ing the scope of de­riv­a­tive con­tracts that have to go through clear­ing houses in a bid to ex­pand the mar­ket in eu­ro­de­nom­i­nated fi­nan­cial prod­ucts.

It said it would also ex­plore mea­sures to fa­cil­i­tate an ECB plan for a Eu­ro­pean in­stant pay­ment sys­tem to chal­lenge the dom­i­nance of US pay­ment cards and the emerg­ing role of US dig­i­tal giants in pay­ment ser­vices.

The plan was pro­posed by the ECB last week, but so far only eight mostly medium or small banks from Spain, Ger­many and France have signed up. /

/Bloomberg

Global reach: The euro is the sec­ond­largest global cur­rency, but its share of the mar­ket is just 20%.

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