How do you swim out of a trap? Europe is increasingly realizing how dependent the continent is on the United States. The fearful question is heard everywhere about what will go wrong in a head-on conflict with Trump. Does American military equipment still work? Can governments still access data in the American cloud?
Europe is intertwined and linked with the US. And now that Trump is exploiting that dependency again and again, governments want to break free. Now hitting back inevitably also means a slap in the face. This certainly also applies to one major dependency that is relatively underexposed but potentially disastrous for Europe: that in the financial system. “We completely underestimate this,” says professor Arnoud Boot, who specializes in financial markets.
Wherever you look in the world of money – the financial markets, how banks and companies finance themselves, the currencies in which European companies trade with the rest of the world, how Europeans pay, how central banks prop up banks during crises, the IT systems – everywhere the US and the dollar play an immense role.
One example: thirteen of the twenty euro countries no longer have their own payment system in shops: the American companies Visa and Mastercard have taken over that market. The Netherlands is one of those countries. Dutch people pay online via their own system: iDeal.
The US controls crucial nodes in the wiring of the international monetary system. And that makes Europe vulnerable.
Vulnerable to pressure from the Trump administration. A French judge of the International Criminal Court said he was almost unable to make digital payments after he was put on a sanctions list by the US because of the arrest warrant for Netanyahu. Because many payments ultimately go through American institutions, the US can not only cut off individuals, companies and countries from international payment transactions, but even make it difficult for Europeans to pay in Europe.
It also makes Europe vulnerable in another way: a financial crisis that starts in the US directly threatens European banks. Boot: “Trump is strongly deregulating the financial sector. There is every reason to assume that things will explode there at some point. That will quickly be on our plate.”
Dollar lines
During the financial crisis in 2008, the euro crisis in 2010 and the corona pandemic in 2020, the US central bank dampened the panic in Europe by lending dollars on a large scale. This is important, because large European banks partly finance themselves with short-term dollar loans, says Boot. “By sowing doubt about whether these Fed dollar lines are still open, Trump could cause immense problems for European banks at such a time, if they quickly need dollars to stay afloat.” According to Boot, stricter requirements are needed for European banks to reduce this vulnerability.
If Europe does nothing, dependence will increase. Because Trump is working on more power for the dollar by giving stablecoins, crypto coins that are linked to the dollar, plenty of room. If these stablecoins become popular in Europe, it could undermine monetary policy, the European Central Bank fears. Boot: “Suppose Amazon gives Europeans a 2 percent discount on their purchases if they pay in dollar stablecoins? I see a great danger: that American big tech companies convert their commercial power into financial power through stablecoins.”
Can Europe break free? Yes, partly, and with a lot of effort.
The European Commission, the ECB, the euro countries, they should all commit themselves to a greater international role for the euro, says political scientist Jens van ‘t Klooster. For example, by promoting the euro as a currency for settling trade.
Van ‘t Klooster: “The ECB thought for a long time that the euro would automatically become more important. But the US has put a lot of energy into the dollar, for example by putting pressure on oil countries to pay for oil in dollars. Europe can also do that in trade agreements. China is now doing the same.”
If the euro is used more often in world trade, there will also be more bank deposits and loans in euros. The ECB must then also be prepared to open euro lines to important trading partners. Van ‘t Klooster: “It takes a long time. But if you change the switches now, you will be somewhere else in ten to fifteen years.”
More is needed: it must be easy to trade in euro debt paper. There must be a single European capital market, instead of fragmented capital markets with different rules in each country. Crucial, says Boot. “The American capital market is second to none.” Everyone can act quickly. “That is why the dollar is so dominant.”
There is also a quick step that will make Europe more independent: a digital version of the euro, which the ECB issues and which must be accepted everywhere in the euro zone. The digital euro should offer Europeans an alternative to Visa and Mastercard. And them again more control care about their money.
But the objections of European banks seem to be being heard in the European Parliament (EP). They are working on their own payment system: Wero. Those two would get in each other’s way. Boot: “Why? It is actually good for European resilience if more payment systems are introduced.” If the digital euro is not created, Europe will lose control over the most fundamental element in our economy: our money, Boot writes with 69 other European scientists (including Thomas Piketty) a letter to the EP.
Moreover, a banking payment system does not solve the core of the vulnerability, says Van ‘t Klooster. “You cannot solve the fact that judges of the ICC cannot pay for a croissant. European banks remain vulnerable to American sanctions. Because they trade in dollars through American banks.”
Europe can therefore become more independent. But as long as the American economy produces large, powerful companies and borrows a lot of money, the dollar’s dominance will remain strong.
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