The steep decline in the value of the US dollar since Donald Trump regained the presidency represents an opportunity. The eurozone is strategising ways to take advantage of it.
On Monday, eurozone finance ministers met in Brussels to discuss how to strengthen the euro’s role as an international currency, citing the “complex” geopolitical environment, strategic competition, regional conflicts, trade tensions, weakened multilateral cooperation and “reshaped” global economic relations as reasons for promoting their common currency.
The EU, a paper prepared for the meeting said, was operating in an increasingly complex geopolitical environment, which was also being reflected in shifts within the international monetary and financial system.
“Long dominated by the US dollar and supported by open global trade and finance, it is being reshaped by fragmentation along geopolitical lines, doubts about the dollar as a safe haven currency and rapid innovation in payment technologies.
“Faced with the risk of increasing volatility of the international monetary and financial system, the EU (European Union) needs to act to strengthen its economic and financial security and the capacity to promote its own interests,” the paper said.
Trump wasn’t mentioned in the paper, but his trade war on the rest of the world, dismantling of post-war multilateral institutions, volatile policymaking, America’s increasingly brittle relationships with traditional allies and its vulnerable public finances have caused the EU to consider the implications for its economy and security.
The EU has long harboured the ambition of, if not displacing the US dollar as the world’s reserve currency, at least providing a serious alternative to it, similar to (but more advanced than) China’s ambition for the renminbi.
Despite being the world’s second-largest economic bloc, Europe’s own weaknesses – the disparate nature and performance of the economies and geopolitical view points of its 27 member states, the shallowness and fragmentation of its government debt markets, the absence of a single legal framework, a compartmentalised banking sector and the need for near-unanimous approvals for any material decision – have worked against the ability to translate the goal into reality.
Trump has provided both the need for Europe to de-risk its exposures to the US and dollar-dominance and the opportunity.
The dollar and America’s dominance of international finance have, over the past 80 years, always had the potential to be weaponised and, at various times, have been wielded to impose financial sanctions.
The seizure of Russia’s foreign currency reserves at the onset of its invasion of Ukraine and Trump’s tariffs, which showed that even the longest and staunchest of allies weren’t safe, has caused countries, including those within the EU, to reconsider their relationships with the US and what would previously have been an unthinkable vulnerability to US dollar-driven financial aggression.
The dramatic surge in US government debt in only the first year of Trump’s second term as president – about $US2 trillion, and rising, has been added – have raised concerns about America’s longer term fiscal stability.
Trump’s continuing insistence on ultra-low US interest rates, the question mark over the US Federal Reserve independence as Trump has manoeuvred to gain control of its board and fears that debasement of the dollar is part of the administration’s strategy of managing its finances provide a more urgent financial rationale for trying to reduce exposures to the US currency.
The US dollar has experienced a sharp decline since Trump regained office. It has depreciated about 11 per cent against a basket of its major trading partners’ currencies, with an even steeper 13 per cent fall against the euro. Against all of its own trading partners, the euro has strengthened about 7 per cent.
That continuing devaluation of the dollar, and Trump’s tariffs, provide further reasons for the EU and others to diversify their foreign exchange reserves and exports away from the US.
The dollar is the world’s dominant currency. It has a 58 per cent share of foreign exchange reserves (although that’s down from about 70 per cent at the start of this century) compared with the euro’s 20 per cent and the renminbi’s 2 per cent. It is used in almost 80 per cent of global trade finance activity, against the renminbi’s 8.3 per cent and the euro’s 7 per cent shares.
That dominance is, however, diminishing. Increasingly, countries are seeking to do trades – including those in commodities where the dollar has previously had absolute dominance – in their own currencies and are making changes to institutional arrangements and payment systems to facilitate those trades.
Only last week the European Central Bank (ECB) launched a permanent facility that allows other central banks to borrow up to €50 billion ($84 billion), providing euro liquidity in exchange for euro collateral in times of stress and circumventing the need for the dumping of euro assets in the event of a financial emergency.
The ECB’s president, Christine Lagarde, told last week’s Munich Security Conference that the move would help the euro “move from a regional to a global perimeter” and, as a lender of last resort facility, boost confidence to invest, borrow and trade in euros.
It will take a lot more to realise the ambition of making the euro a viable alternative to the dollar as a global reserve currency.
The EU will need to remove its internal trade barriers, which the International Monetary Fund has said are equivalent to a 44 per cent tariff on goods.
It will need to have a single corporate law framework across its member states, rather than 27 national laws.
If the EU doesn’t seize the moment the global re-evaluation of America as an ally, trading partner and financial safe haven has provided, it may never have the same opportunity again to realise those ambitions.
It will need a more unified banking system, deeper capital markets and with more eurobonds guaranteed by the entire bloc.
The ECB will need to press ahead with its plans to issue digital euro and euro stablecoins to take advantage of the Trump administration’s embrace of the opportunity to use stablecoins backed largely by US treasury bonds to create a new source of buying support for its debt. Those US stablecoins will be privately issued, however, rather than backed by a central bank.
It will also have to accept the reality (and overcome opposition from within the EU) that, while a stronger euro might mean cheaper imports, lower inflation rates and reduced borrowing costs, it will harm the export competitiveness of a bloc which consistently runs big trade surpluses in goods.
All of those things could be done if the EU can overcome the inertia and internal dissent it has experienced previously because of the divergent economic conditions and views of the countries within its unwieldy structure.
A recent grouping of six of its stronger member states – Germany, France, Italy, Spain, the Netherlands and Poland – has vowed to moved faster and alone, if necessary, to reform the EU, better integrate its economies and markets and boost the euro. The group, dubbed the “E6,” was galvanised by Trump’s sabre-rattling over the fate of Greenland and doubts about America’s commitment to NATO.
Eroding dollar dominance isn’t a near term project. It can only happen, if it were to happen, over decades.
The sea changes in America’s relationships with the rest of the world over the past year, however, have created the opening for a new and more decisive phase in the “European Project,” a project that began almost three quarters of a century ago that sought European integration and a more prominent role in geopolitics.
If the EU doesn’t seize the moment the global re-evaluation of America as an ally, trading partner and financial safe haven has provided, it may never have the same opportunity again to realise those ambitions.
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.
