EU: Shifting from Dollars, and London

Published on January 20, 2021

The European Commission laid out yesterday an ambitious, long-term strategy for raising the international profile of the euro and EU markets, for greater independence from the dollar and from US pressure, and for lessening Europe’s reliance on large financial centers outside of the EU (i.e., London).

These proposals will take years to pan out, and the EC has not set any target dates for hitting many of its goals, but the European Central Bank and EU governments will fall firmly behind the EC strategy, and investors may be well served to take heed of the specifics and intent behind these measures. Namely:

** The Commission is pushing for the further denomination of oil and gas imports in euros. Since 2018, when it first launched a drive to break US dollar dominance in energy contracts, the EU has raised its volume of euro-denominated contracts for gas from 38% to 64%, and the EC wants to push that ever higher.

** EU officials are still smarting at their helplessness in the face of the Trump administration’s 2018 decision to withdraw from the JCPOA nuclear agreement and to reimpose sanctions on Iran, forcing the EU into cutting trade relations with Iran altogether in the process. These US actions also hit at the EU securities depositories Clearstream and Euroclear, as well as at the EU’s SWIFT bank payment and messaging system. The Commission has not proposed specific measures to insulate the EU systems from US pressure but will work with EU leaders with the goal of ensuring that the US is not again able to force EU companies to stop doing business with a given country like it did with Iran.

** The EU executive is looking at ways to cut Europe’s reliance on the City of London post-Brexit, especially when it comes to building up central counterparties. The Commission will be asking traders to cut their exposure to clearing houses outside of the EU as much as possible by mid-2022, moving to central counterparty clearinghouses (CCPs) based in the European bloc.

** Along those lines, the EU will turbocharge efforts to complete its elusive banking union, including the EU Deposit Insurance Scheme and Capital Markets Union. A major goal of these efforts will be to offer EU companies access to alternative sources of capital than through the now dominant domestic bank loans.

** The Commission wants to encourage trading of euro denominated bonds and derivatives, especially now that there will be 750 billion euros of jointly issued EU debt coming to market over the next three years by the Recovery Fund. Together with 90 billion euros of borrowing by the European Stability Mechanism, 100 billion by the EU’s SURE project to help fund part-time work schemes across the EU, and 60 billion a year of regular issuance by the European Investment Bank, the EU will soon have over a trillion euros of high-quality paper on offer to trade on the markets.

** The Commission also wants to make the EU the global hub for “green finance” so that as many as possible of the newly minted “green bonds” are denominated in euros. While that market is still small, it is likely to keep growing quickly, and the EU is keen to drive the nascent market for hydrogen also into euros.

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