EU’s dependence on dollar to be reduced under new proposals

Plans to reduce European Union dependence on the US dollar – and so improve the bloc’s ability to run an independent foreign policy that is less exposed to US sanctions – were unveiled on Wednesday by the European commission.

The proposal has grown in significance for European integrationists as firms from EU countries withdraw investments from Iran faced by the threat of punitive secondary sanctions from the US.

The EU, unlike the US, wants to maintain the nuclear deal with Iran signed in 2015, but needs to deliver on its side of the bargain by increasing trade with Tehran.

Iranian rulers are becoming increasingly restive as the EU struggles to develop an institutional mechanism to shield Europe from the threat of US sanctions on firms, banks and individual directors that continue to trade with Iran. The US secondary sanctions can be applied on any European firm with links to the US market.

But the commission plans, focussing on increasing the use of the euro in the energy field, are part of a longer-term move to “de-dollarise” the world economy.

The proposed measures include using the euro as default currency in energy contracts agreed between EU member states and third countries, as well as the creation of euro-denominated price benchmarks for crude oil. The EU is one of the world’s largest energy importers.

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In other measures, the commission says the EU must develop “a full range of trustworthy interest rate benchmarks” in financial markets, and a fully integrated instant payment system. The bloc’s executive arm will also explore the possibility to further develop the role of the euro in foreign exchange markets.

Launching the long-term plan, EU economic affairs commissioner Pierre Moscovici said: “A wider use of the euro in the global economy yields important potential for better protecting European citizens and companies against external shocks and making the international finance and monetary system more resilient.”

The commission added its plans came “at a time where the recent global trends, the emergence of new economic powers along with the development of new technologies are supporting a potential shift towards a more diversified and multipolar system of several global currencies”.

In a pamphlet coinciding with the commission’s plan, the Centre for European Reform thinktank said the proposals had developed because “the Trump administration is weaponising economic policy, making the euro’s standing in global markets a question of foreign policy, rather than simply of economics”.

The CER warned: “The ambition to give the euro a greater role in global markets faces huge economic and political obstacles. Not only is the dollar’s role in the world economy deeply entrenched, the policy changes that would bring about the conditions necessary for growing the euro’s role – an ample supply of European safe assets and a European Central Bank (ECB) that recognises its worldwide responsibilities – would meet fierce resistance, especially in Berlin. Likewise, the consequences of increased global demand for the euro would challenge some of the eurozone’s core policies.”

In the short term the EU is trying to protect trade with Iran by developing a Special Purpose Vehicle, as a way of facilitating trade between the EU and Iran.

An SPV could take many forms, from a standalone state-owned bank to a clearing house for companies that transfer money to Iran, repatriate funds from the country or engage in a form of barter trade with it. On the barter proposals, if an EU firm bought oil from Iran, the SPV could arrange for the cost to be netted off by another firm selling into Iran, so reducing the need for currency or bank transactions.

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Speaking on Wednesday the Iranian foreign minister Mohammad Zarif said he had been assured by the EU that it has made the final arrangements for the SPV, and the proposals will be established in the near future. He added the US was trying to gather information about the SPV in order to hinder its development, so the EU was keeping plans for the SPV confidential to avoid US sabotage.

Richard Nephew, sanctions expert in the state department under Barack Obama, said in London the US commitment to sanctions as a policy tool has bipartisan support, and few see the tool as being over-used. He predicted that, in May, the US – in a bid to topple the regime – may remove waivers on Iranian oil imports currently provided to China and India. He suggested the Indian waiver may end after the elections in India in April.

He said: “What we are hearing out of Russia, China and Europe about finding alternative payment systems is going ultimately be pretty detrimental both to general globalisation and economic integration but also to the use of sanctions as a tool of the US. Anyone who has studied US foreign policy enough knows that just because something is inevitably not in our interest does not mean we are going to stop doing it in the short term.”

He suggested the EU, faced by the threat of US sanctions, may reconfigure initially its planned SPV so it is a humanitarian vehicle. Humanitarian goods, primarily food and medicine, are exempt from US sanctions, so the organisers of a humanitarian SPV should not be subject to sanctions.

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