Hitting Trump where it hurts

Giles Merritt explains how Europe could put a dent in President Trump’s ego and in the global soft power of the US by making good on its longstanding ambition of a euro that rivals the dollar.

Reforming the eurozone to make Europe’s single currency invulnerable to crisis has been beyond our politicians’ reach. But how about strengthening the euro to hit back at Donald Trump?

Trump has ‘weaponised’ the dollar, yet it is within the eurozone’s capacity to respond in kind. If making the euro ‘fit for purpose’ two decades after its introduction hasn’t united EU governments, maybe striking back at the Trump administration’s abuse of the dollar’s privileged position could do so.

President Trump threatens to ban corporations and even countries from access to the dollar’s international settlements mechanisms if they defy US sanctions against Iran. There is little evidence that Iran has been cheating on its nuclear standstill pledge, but that’s immaterial to Trump. His hard line highlights the unilateral powers ceded to the US through its ownership of the world’s principal reserve currency.

Those powers have been awesome since the end of the Second World War. The Federal Reserve, America’s central bank, controls something called Fedwire, the settlements system that makes financial deals in dollars anywhere in the world subject to US law and Washington’s extra-territorial authority. In addition to Fedwire’s control of dollars, a linked system known as CLS subjects 18 other currencies to US regulations.

The euro has had its ups and downs, but could be a major geopolitical competitor to the dollar. All that’s needed is for Europe to make its single currency as muscular as originally envisioned.
Although it has a larger share of world trade than the United States, Europe denominates in dollars most of its trade in key sectors ranging from energy to aircraft. British economist Graham Bishop, who is urging a tough euro fightback, notes that the US has 14% of global trade, whereas the EU’s share is 17% and that’s without all the intra-European business transacted within the Single Market.

The euro has made considerable progress since its launch 20 years ago. It now accounts for 36% of international payments and is catching up with the dollar’s 40% share. And about a fifth of the foreign exchange reserves of the world’s 200 or so national governments are held in euros. That’s still far behind the mighty dollar, but an advance from its standing start in 1999.

The euro nevertheless suffers from serious handicaps, most of them self-imposed. It was born prematurely, in the sense that it has no political base. “Castles in the air”, complained Germany’s Chancellor Helmut Kohl when the Maastricht summit of 1992 moved the Common Market forward by creating the EU, but failed to agree on political union to underpin and direct the shared currency.
Economic and Monetary Union (EMU) sounds good, but without a strong political mechanism it is unstable. This instability was demonstrated by the sovereign debt crises that 10 years ago hit Greece, Ireland, Portugal, Spain and Cyprus, and at times seemed to threaten the euro’s very survival.

Despite those warnings, successive European governments have ducked agreement on both a badly needed banking union and a capital markets union. The result is Europe’s fragmented financial markets and weak, risk-prone banks that compare poorly with the US.

The European project needs a powerful boost if it is to beat off the onslaughts of its populist critics. Pushing through the stalled European Deposit Insurance Scheme could be immensely popular with EU citizens if well presented. It would ensure that people’s savings can never be gobbled up by a bank’s collapse.

That in turn could open the way to a streamlining of the eurozone and the creation of deeper and more liquid financial markets. Europe would then be able to lure away from Wall Street a greater share of international investment that goes into bonds and Treasury bills.

Trump’s high-handed approach to trade and monetary policies should alert Europe to its shortcomings. Inertia and internal squabbling have left prized EU projects like EMU and more aggressive industrial policies to stagnate. Fighting back against the Trump administration’s abuse of America’s powers as the world’s ‘indispensable nation’ must become the rallying call of the incoming European Commission.