Tinkering at the edges will not deliver a stronger euro

Heiko Maas, the German foreign minister, was right to call on the EU to play a bigger geopolitical role. I wish him well, but fear that the most important part of his proposal may be not have been sufficiently thought through.

I am referring to his idea of establishing a competitor to the Society for Worldwide Interbank Financial Telecommunication — the global payments and financial information system better known as Swift. He wrote in Handelsblatt last week that for the EU to become less dependent on the US it is “essential that we strengthen European autonomy by establishing payment channels independent of the US, a European monetary fund and an independent Swift system”.

Since it began operating in 1977, Swift has provided a vastly more efficient cross-border payment infrastructure than the previous system based on communication by telegraph messages. A modern competitor to Swift may or may not be useful, but it is neither necessary nor sufficient as an instrument to strengthen the EU’s geopolitical power.

The Russian central bank has already set up an alternative, for domestic use mainly. More competitors will surely emerge. But the focus on Swift misses the point. The reason why European companies are vulnerable to US sanctions has nothing to do with Swift.

Swift is based in Belgium and subject to Belgian law. The US exercises no formal control over its governance. This did not stop the US Treasury from following President Donald Trump’s decision to quit the Iran nuclear deal with a November 4 deadline for Swift to cut off Iranian banks from the system. But the true source of US power lies in the global role of the US dollar and the predominance of the American financial system.

The Trump administration is also in the position to cut foreigners out of US financial markets, or stop them from travelling to the US if they continue to do business with Iran. These are known as secondary sanctions — the soft power instrument of choice in a globalised world. The EU has no equivalent capability, nor does it have the ability to defend itself from secondary sanctions imposed by others.

Angela Merkel has raised another concern. The German chancellor has pointed out that the EU should not abandon the system because the bloc depends on co-operation with the US in the so-called terrorist finance tracking programme within Swift.

In the search for a more independent European security architecture, Mr Maas is right to focus on economics in principle, but he has selected the wrong instrument. The EU’s priority should be a stronger international role for the euro. The euro is the world’s second largest currency, but is trailing the dollar on all important metrics by wide margins: for central reserves, cross-border payments and investments; for foreign exchange; and in debt and loan markets. After the launch of the euro, the gap gradually narrowed, but has widened again since the start of the eurozone crisis.

Charles Kindleberger, the noted US economic historian, explained the predominance of a single global currency in terms of economic dynamics and network effects. The domination of sterling and, later, of the dollar have parallels to the emergence of English as the global language. I recall serious discussions in the early days of the monetary union in 1999 about whether the euro could supplant the dollar as the leading global currency. It did not happen then.

Mr Trump’s break with multilateralism would give the EU its best opportunity yet to achieve such a goal. It would require, at minimum, an end to the permanent eurozone crises. It would also require the EU to address the macroeconomic imbalances that have given rise to large and permanent current account surpluses. If you are serious about a stronger international role, you cannot dump your economic problems on the rest of the world, forcing it to absorb your structural savings surpluses.

It does not seem possible for the euro to strengthen its global role without a single safe asset — a eurobond. Modern financial markets require the presence of risk-free securities to function effectively. We are dealing with issues that go deep into the debate on the future of the euro. To strengthen the eurozone’s role internationally would require a re-wiring of the EU’s machinery.

Opposition to Mr Trump always pleases European crowds. But the measures needed to strengthen the EU’s geopolitical role go beyond the empty-shell reforms currently under discussion. They even go beyond the bolder proposals put forward by the French president, Emmanuel Macron. What we need to hear from senior politicians like Mr Maas is not a statement of lofty ambitions, but willingness to create political majorities where there are none right now. I do not see that happening.


Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.