The Euroization of Energy and Finance: Outlook

On December 5, 2018, the European Commission presented actions to strengthen the role of the euro and adopted recommendations to promote the wider use of the euro in international energy agreements and transactions and to foster a deep European financial sector.

Europe imports some 90 percent of its oil and 70 percent of gas. Overall, the EU accounts for 27 percent of global oil imports, which is estimated at 300 billion euros a year. At the same time, over 85 percent of the EU’s long-term energy contracts are denominated in US dollars, although only 2 percent of energy resources are delivered from the United States. The bulk of oil and gas is delivered to Europe from Russia (34 percent), while the Middle East and Africa together deliver 33 percent and Norway 20 percent of oil and gas.

Historically, the US dollar is the main currency of international trade and global financial reserves. In 1974, the dollar also became the main currency for oil transactions, following which all of the raw materials and commodity markets turned into dollar-based financial markets.

This means that any unilateral US steps taken with regard to the jurisdiction of other countries, along with trade wars and the erosion of the foundations of international trade regulation can halt or hinder trade, including in energy.

The threat of sanctions against the European companies parties to the Nord Stream 2 project and the risk of US secondary sanctions against the European energy companies that are cooperating with Iran and Russia have forced the EU to ponder the creation of alternative settlement systems and the use of the euro as the contract currency, if only to ensure a safe energy supply.

A large share of Russian energy exports are paid for in US dollars, whereas all dollar accounts of Russian companies are controlled by the US authorities, and the Countering America’s Adversaries Through Sanctions Act adopted in 2017 allows freezing the assets of Russian banks and oil and gas companies, as well as pressuring Russian companies’ counteragents in US-allied countries.

In this situation, Russia must urgently convert to euro settlements with the EU, which also wants to strengthen the role of the euro in trade.

In addition, the domination of the US dollar is an opportunity to collect revenue from across the world and an instrument of US control over the global financial system and the economic processes. The “America first” principle means primarily that even NATO allies are no longer regarded as partners but as rivals the United States will compete with to protect its interests.

However, challenging the US dollar, the national currency of a country whose gross domestic product is worth $20.7 trillion and imports from around the world amount to $2.9 trillion, is an almost impossible goal even for the EU. The EU can only attain it by joining forces with all its trade and foreign economic partners, primarily Russia, the Middle East and China.

The EU’s gross domestic product is estimated at $18.8 trillion, and its banking assets are worth one-third of the US bank assets. This seems to be enough to convert part of the EU’s international settlements to the euro. The financial sovereignty of national economies can be only revived through the regionalization of financial transactions and the settlement of contracts in the currencies of states and the associations of states whose economic weight is comparable to that of the United States.

But there are at least five obstacles hindering the euroization of trade. The first and largest of them is US resistance, because this would prevent using dollar accounts as an instrument of sanctions pressure on countries and companies, and could also reduce international investors’ interest in US assets, primarily treasury bonds, against the backdrop of a record-high US sovereign debt and the need for its regular refinancing. The second obstacle is the absence of benchmarks and basic exchange traded contracts, including oil deals, denominated in the euro. The third obstacle is the insufficient size of the European financial market and the volume of quality euro denominated liquid assets in which central banks’ dollar reserves and financial capital can be invested. Fourth, the EU has not yet created a fully European clearing system or a European equivalent of the SWIFT system. And the fifth obstacle is the complicated system of decision making in the EU countries, which can draw out and complicate things.

Practice shows that Europe will not engage in a direct conflict with the United States if there is a risk of secondary sanctions threatening the EU’s economy and the possibility of US military and political measures restricting the independence of its allies.

However, the euroization is unavoidable even despite major obstacles. The replacement of globalization with regionalization, the ongoing changes in the global economy and the creation of new technologies will lead to a rapid development of a diversified multipolar system based on several global currencies. Since there is a general interest in this new financial and economic architecture, the EU’s efforts to remove its vulnerabilities and attain financial sovereignty will also facilitate its rapprochement with Russia.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.