EU Seeks to Curb Reliance on US Dollar After American Sanctions Exposed Financial Infrastructure Vulnerabilities

The European Union (EU) is reportedly planning to reduce its reliance on the U.S. dollar-based financial system, after American sanctions on Iran exposed the vulnerabilities of the bloc’s financial infrastructure. According to officials, who are now determined to challenge the dollar’s supremacy, the renewed desire to boost the role of the euro currency is also partly inspired by “lessons learned from the Covid-19 pandemic.”

The US Dollar Domination

In sentiments expressed in the draft European Commission (EC) policy paper, officials warn of the current over-reliance “on the US dollar to cushion financial tensions and stability risks.” Prior to the latest revelations, the EU had “long sought to promote greater use of the euro as the bloc tries to bolster its financial and economic autonomy.”

Yet, as a Financial Times report explains, it took the negative effects of the dollar’s dominance under the Trump presidency to nudge EU leaders into action. This is because when the U.S. government reimposed sanctions against Iran, the EU financial infrastructure was also at the receiving end of the U.S. dollar’s dominant power.

Furthermore, the report states that EU leaders, who seemed too eager to salvage the nuclear agreement with Iran, were forced to “set up a special-purpose vehicle (SPV) to facilitate payments for legitimate trade between the EU and Iran.” Nevertheless, this SPV still encountered difficulties and this is what partly has prodded European leaders to act. The EC paper says:

The EU should develop measures to shield EU operators in the event a third country compels EU-based financial-market infrastructures to comply with its unilaterally adopted sanctions.

After the United States reintroduced sanctions on Iran, their impact on the European financial infrastructure was direct. For instance, “Swift the payment messaging system, the Euroclear and Clearstream securities depositories” were all affected.

Moving Away From the Dollar

In the meantime, the EC policy paper lays out some of the specific steps that the bloc needs to take, and these “include using a planned review of EU regulation of financial benchmarks to encourage them to be denominated in euros.” Many of such benchmarks are presently denominated in U.S. dollars.

Furthermore, EU policymakers also want to find energy alternatives to crude oil, where the “main benchmarks such as Brent and WTI are tied to the dollar.”

In the end, EU leaders hope the stronger global role for the euro will “shield the economy from foreign exchange shocks and reduce reliance on other currencies”