EU seeks to reduce reliance on US dollar after US sanctions exposed vulnerabilities in financial infrastructure – Finance Bitcoin News

The European Union (EU) plans to reduce its dependence on the US dollar-based financial system, after US sanctions against Iran exposed vulnerabilities in the Union’s financial infrastructure. According to officials, now determined to challenge the supremacy of the dollar, the renewed drive to strengthen the role of the euro is also partly inspired by “lessons learned from the Covid-19 pandemic”.

The dominance of the US dollar

In the sentiments expressed in the European Commission (EC) draft policy paper, officials warn of the current over-reliance “on the US dollar to cushion financial strains and stability risks.” Before the latest revelations, the EU had “long sought to promote greater use of the euro as the bloc tried to strengthen its financial and economic autonomy”.

Yet, as a Financial Times report explains, it took the negative effects of the dollar’s dominance under the Trump presidency to push European leaders into action. Indeed, when the US government reimposed sanctions on Iran, the EU’s financial infrastructure was also the target of the dominant US dollar power.

Further, the report states that EU leaders, who seemed too keen to save the nuclear deal with Iran, were forced to “create a special purpose vehicle (SPV) to facilitate payments for trade. legitimate between the EU and Iran ”. Nevertheless, this SPV still encountered difficulties and this is what partly pushed the European leaders to act. The EC document says:

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.

After the United States reintroduced sanctions against Iran, their impact on European financial infrastructure has been direct. For example, “Swift, the payment messaging system, Euroclear and Clearstream securities depositories” have all been affected.

Get away from the dollar

In the meantime, the EC policy document outlines some of the specific steps the bloc needs to take, and these “include using a planned review of EU financial benchmarks regulation to encourage them to be denominated in euros ”. Many of these benchmarks are currently denominated in US dollars.

In addition, EU policy makers also want to find energy alternatives to crude oil, where “major benchmarks such as Brent and WTI are tied to the dollar”.

Ultimately, EU leaders hope that the strengthening of the euro’s global role “will protect the economy from exchange rate shocks and reduce dependence on other currencies”

Do you think the EU will succeed in strengthening the euro? You can share your opinions in the comments section below.

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