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

The domination of the US dollar

Sentiments in the European Commission’s (EC) draft policy document warn officials of the current over-reliance on “the US dollar to absorb 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 seeks to strengthen its financial and economic autonomy”.

But still, like a Financial Times report explains that it took the negative effects of the dollar’s dominance under Trump’s presidency to spur EU leaders into action. This is because when the US government re-imposed sanctions on Iran, the EU’s financial infrastructure was also on the receiving end of the US dollar’s dominant power.

Furthermore, the report states that EU leaders, who seemed too eager for the nuclear agreement with Iran, were forced to “establish a special-purpose vehicle (SPV) to facilitate payments for legitimate trade between the EU and Iran”. Nevertheless, this SPV was still experiencing difficulties and this is what prompted European leaders to take action in part. The EC paper says:

The EU should develop measures to protect EU operators in case a third country forces financial market infrastructures established in the EU to comply with its unilateral sanctions.

After the United States reintroduced sanctions against Iran, their impact on Europe’s financial infrastructure was immediate. For example, “Swift’s payment messaging system, Euroclear and Clearstream’s securities depositories” were all affected.

Get out of the dollar

In the meantime, the EC policy paper outlines some of the specific steps the bloc should take, and these “include using a planned revision of EU regulation on financial benchmarks to encourage them to be denominated in euros. ” Many such benchmarks are currently denominated in US dollars.

In addition, EU policymakers also want to find energy alternatives to crude oil, where “key benchmarks such as Brent and WTI are pegged to the dollar”.

Ultimately, EU leaders hope that the stronger global role of the euro “will protect the economy from exchange rate shocks and reduce dependence on other currencies”

Do you think the EU will succeed in making the euro stronger? You can share your thoughts in the comments below.

Tags in this story

COVID-19, economic autonomy, Euro, European Commission, European Union, Finances, financial infrastructure, financial market, Society for Worldwide Interbank Financial Telecommunication (SWIFT), U.S. dollar, us sanctions iran

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