Tuesday, May 30, 2023

EU sets plans to reduce dollar dependency in post-Trump era

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Brussels is ready to warn that global markets are too dependent on the dollar as it seeks ways to reduce Europe’s vulnerability to US sanctions and other financial risks, in a currency challenge supremacy a few days before the inauguration of Joe Biden as president.

A draft European Commission guidance document viewed by the Financial Times reveals the depth of the EU’s frustration after four years of administration of Donald Trump, whose policies have underscored the dominance of the United States and its currency in the global financial system.

In particular, the document highlights the EU’s difficulties in asserting its independence in the face of sanctions against Iran imposed by Mr. Trump, citing them as evidence of the need to “protect” the bloc from “the effects of extraterritorial application. illegal ”such measures. .

“The Trump years have exposed our vulnerabilities, and we must address them even if he is gone,” a commission official said. “It’s about the EU’s place in the world – having the means to be an economic and financial powerhouse commensurate with our size.”

Mr. Trump’s strategy in Iran has had a direct impact on financial infrastructures based in Europe, such as the Swift payment messaging system and securities depositories Euroclear and Clearstream.

Washington’s sanctions on Iran forced Brussels to set up a special vehicle to facilitate payments for legitimate trade between the EU and the Islamic Republic – a process fraught with pitfalls.

“The EU should develop measures to protect EU operators in the event that a third country forces EU-based financial market infrastructures to comply with its unilaterally adopted sanctions,” the document said.

The document underscores the EU’s ambition to strengthen its self-sufficiency in a range of sectors, including finance, after the Trump administration tore up transatlantic standards. But it is expected to be adopted by the European Commission on the eve of Joe Biden’s swearing-in as US president on Wednesday, and as the EU vows to seek a new era of cooperation with Washington after the acrimony of years Trump.

Other plans in the document that seek to bolster the bloc’s strategic autonomy include tighter control of foreign takeovers using the EU’s new system to filter foreign direct investment.

The proposed buyouts should be scrutinized to see if they “would make the target EU company more inclined to comply with such extraterritorial sanctions,” the document said, on the grounds that the acquisitions could then be blocked for national security reasons.

According to the project, the EU must also find ways to strengthen the role of the euro in light of lessons learned from the Covid-19 pandemic. The document warns that “global financial markets are too dependent on the US dollar to cushion financial strains and stability risks.”

EU officials have warned that the draft could be revised before the text is adopted by the European Commission on Tuesday.

The bloc has long sought to promote greater use of the euro, for example in commodity contracts, to strengthen its financial and economic autonomy.

The specific steps outlined in the document include the use of a planned review of European regulation of financial benchmarks to encourage them to be denominated in euros. Most are based on dollars.

Policymakers want to find energy alternatives to crude oil, where major benchmarks such as Brent and WTI are tied to the dollar. The document cited gas, where a euro-based contract negotiated in Amsterdam is emerging rapidly, and hydrogen as markets in which the role of the euro should be developed.

Brussels believes that a strengthening of the global role of the euro “would protect the economy from exchange rate shocks and reduce dependence on other currencies”.

“It would also help achieve globally shared goals such as the resilience of the international monetary system, a more stable and diversified global monetary system and greater choice for market operators, making the global economy less vulnerable.” , indicates the log.

The Commission is also concerned that the bloc has become increasingly dependent on non-European investment banks which “in times of financial crisis.” . . may choose to reduce their presence in the EU and focus on their internal market ”.

Other parts of the document reiterate the EU’s ambitions to be more independent of the UK financial market infrastructure after Brexit – notably UK-based clearing houses.


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