One of the strengths of the United States is its currency – the dollar. The strength lies in the fact that a number of commodities are priced and traded exclusively in the US dollar. Examples include gold and oil. As a result, when the US takes a stand in its foreign policy and imposes sanctions, companies in other countries that trade in dollars, have to obey those economic sanctions.
This is what is currently happening in the case of Iran. Following the imposition of US sanctions against Iran, firms from EU countries withdrew their investments from that country as they were faced with the possibility 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. These punitive secondary sanctions could also impact banks that process transactions of these firms and even directors.
It is therefore in the interest of its member states that the European Commission seeks to reduce the importance of the US dollar in international trade, especially in the area of energy. The European Commission is actually seeking to, sort of, ‘de-dollarise’ the economy.
In the energy sector the EU is seeking to introduce the euro as the default currency in contracts between its member states, and to price benchmarks for crude oil that are quoted in euros. It is possible to do this as the EU is one of the world’s largest importers of oil.
Some numbers make this position highly justified. The European Union economy is the second largest economy in the world after the United States and in terms of purchasing power parity, the second after China. It has major financial hubs, and even if Brexit were to happen, there will still be major financial hubs such as Frankfurt, Amsterdam and Paris. Moreover the European Union is the largest exporter in the world and as of 2008 the largest importer of goods and services.
We are moving to the establishment of a more diversified system of currencies than we have been accustomed to so far
As part of the long-term plan to reduce the EU member states’ dependence on the US dollar, the European Commission is also seeking to create reliable and trustworthy interest rate benchmarks in financial markets, strengthen the role of the euro in foreign exchange markets, and set up a fully integrated international instant payment system.
There are two important obstacles which the European Commission needs to overcome. The first is that the European Central Bank would need to take on a more important global role – something which it has not shown itself too keen to do. Last week’s statement by the Commission president, Jean Claude Juncker, that the EU listened too much to what the International Monetary Fund had to say at the time of the Greek sovereign debt crisis, is a sign of this reluctance on the part of ECB to assume greater responsibilities on the world stage.
The second obstacle is represented by Germany, admittedly the economic powerhouse of the EU. Would Germany be willing to take on the responsibility of being the primary player in a currency bloc, that would be seen as an alternative to the US dollar? The point is that the EU is likely not alone in searching for alternative payment systems. China and Russia are likely to do the same. Is this an opportunity for them to cooperate? We are moving to the establishment of a more diversified system of currencies than we have been accustomed to so far.
One may wonder whether this is all too abstract for our economy. No, it is not. When we consider the very high and significant contribution that international trade of goods and services and international investment make to our economy, this discussion assumes a great deal of importance for Malta.
We therefore require stability in the world economy and we need to be shielded from certain external shocks over which we have no control. A stronger role for the euro in the international financial markets would contribute to making our economy more resilient.
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