The European Union is considering switching payments from the US dollar to the euro after Washington threatened to target European firms working in Iran, according to reports.
The measure may help the EU to retain one of the world’s largest markets, which was opened for trade after the historic nuclear deal signed by Tehran and the P5+1 powers (China, France, Russia, UK, US, plus Germany) in June 2015.
The idea to eliminate the role of the greenback in international settlements is not new. Aside from the EU, a number of nations have been mulling the idea. RT discussed with analysts how realistic the prospect of countries ditching the dollar is.
In light of the recent developments Iran is the most pressured nation to drop the dollar with Tehran having partially adjusted trade without the US currency, Alexandre Kateb, president of Competence Finance SAS, told RT.
“When Iran was previously under sanctions from 2012 to 2015, it established new mechanisms to bypass US-related financial institutions, such as barter exchange and to replace the dollar with other currencies, such as the renminbi in its bilateral trade with China or the euro in its trade with European countries,” the economist said.
At the same time, China’s recent move to trade oil in yuan is seen as an initial step to challenging the dollar dominance, Stephen Innes, Head of FX Trading for OANDA in Asia Pacific told RT, stressing that the number of bilateral trade agreements, signed amongst Asia Pacific nations, will settle in yuan.
“Mainland it is laying the ground for the Belt and Road Initiative, and China is even sweetening the pot by offering swap facilities to local countries to promote the use of the yuan,” he added.
Experts are unanimous on the point that bi- and multi-lateral pacts between various nations could become the major drivers on the way toward decreasing the dependence on US currency in international trade.
“This would depend on the leverage the EU, the UK, Russia and China deploy. The likely scenario is diversification – bilateral arrangements between trading partners, or regional arrangements, substituting for multilateral arrangements that supported dollar dominance,” Ramaa Vasudevan an Associate Professor at the Department of Economics, Colorado State University told RT.
At the same time, analysts admit that getting rid of the greenback is not an easy task. It took the US dollar nearly a century to unsettle the British pound that had been enjoying its preeminence through the 19th century and the first half of the 20th as the global reserve currency.
“Old habits are hard to break as most of the global hedging is still done on US exchanges like Nymex or ICE,” Innes said. “The issues are working out the deliverable to hedge ratio factors which could put many off from breaking long-held settlement in US dollar.”
“The US dollar is still, for many reasons, the international trade and reserve currency of choice,” according to Kateb. “The whole international financial system is currently structured around the United States and around the central role of the dollar.”
However, the expert noted that the international system will change dramatically. Rapid development of blockchain technology along with rooting of virtual currencies is reportedly set to bring about the changing process.
“Eventually, the evolution of global finance will be very much related to the evolution of the global balance of power,” the economist told RT. “This will not happen overnight. It will take time and many more crises and balance shifts. None really knows what the new system will look like.”
The experts agreed that expelling the greenback from its dominant position in the international monetary system will take much more effort than just replacing it with the euro or other domestic currencies.
“Dollar dominance does not depend simply on its use to denominate trade, but on the dollar’s role as the pivot of the international financial system – the fact that about 88 percent of the average daily turnover of foreign exchange instruments is against the dollar, in contrast to the share of the euro which is only about 31 percent,” said Vasudevan.
The researcher highlighted that the recent impulse for dislodging the US currency is a symptom of a wider discontent with the rules of the dollar system, but is not a cure for the dollar problem.
The European Union is planning to switch payments to the euro for its oil purchases from Iran, eliminating US dollar transactions, a diplomatic source told RIA Novosti.
Brussels has been at odds with Washington over the US withdrawal from the Iran nuclear deal, which was reached during the administration of Barack Obama. President Donald Trump has pledged to re-impose sanctions against the Islamic Republic.
“I’m privy to the information that the EU is going to shift from dollar to euro to pay for crude from Iran,” the source told the agency.
Earlier this week, EU foreign policy chief Federica Mogherini said that the foreign ministers of the UK, France, Germany, and Iran had agreed to work out practical solutions in response to Washington’s move in the next few weeks. The bloc is reportedly planning to maintain and deepen economic ties with Iran, including in the area of oil and gas supplies.
Mogherini stressed that the sides should jointly work on the lifting of sanctions as an integral part of the historic nuclear deal. “We’re not naive and know it will be difficult for all sides.”
The Iran nuclear deal, known as the Joint Comprehensive Plan of Action (JCPOA), was sealed three years ago in Vienna between Tehran and the P5+1 powers (China, France, Russia, UK, US, plus Germany). The agreement saw decades-long international sanctions lifted in exchange for Iran curbing its controversial nuclear program. On January 16, 2016, the parties to the deal announced the beginning of its implementation.
The lifting of international sanctions gave Iran access to the world’s markets for the first time in nearly four decades. Since then, Tehran has managed to significantly increase its exports of crude.
However, oil is pegged to the US dollar on international markets, making it difficult for Iran’s partners to make payments for crude and for Tehran to receive them. With the dollar playing the leading role on international financial markets, re-imposing sanctions would mean cutting Iran off from the global financial system.
At the same time, dozens of contracts signed between European businesses and the Islamic Republic could be at risk of cancellation if Brussels obeys Washington’s sanctions. This would damage Iran’s economy and European firms would lose a huge market in the Middle East. Switching to alternative settlement currencies allows both sides to continue trading despite US sanctions.
A DER SPIEGEL Editorial by Klaus Brinkbäumer
Time for Europe to Join the Resistance
Iranian protesters burning U.S. flags after Donald Trump announced his withdrawal from the Iran nuclear deal.
Trump’s renown is rooted in American hero myths. Trump says that women like Carla Bruni lust after him, something that women like Carla Bruni vehemently deny.
Trump says he is exorbitantly rich, yet Trump ran himself into the ground with his casinos to the point that he was 295 million dollars in debt in 1990. He was bailed out by the banks and by his father. The greatest myth, though, has to do with Trump’s alleged negotiating expertise. This too is nonsense. Trump was never proficient in the art of the deal. As a businessman, he paid far too much for substandard properties and has shown no patience as a politician. He isn’t curious. His preparation is nonexistent. Strategy and tactics are both foreign to him. Trump is only proficient in destruction. And that’s what he does.
He backed out of the Paris climate agreement while promising a “better deal for America.” But nothing came of the promise, neither a plan nor meaningful talks. In Trump’s Washington, the only thing that matters is dismantling the legacy of his predecessor, Barack Obama. Trump also promised to improve Obama’s health care plan, but the details are complex and bothersome. So Trump destroyed Obamacare and has done nothing to replace it.
Now, he is playing the same game on the world stage with the Iran nuclear deal. Trump refers to it as “the worst deal ever,” which is why he has now pulled the U.S. out of it. The negotiations that resulted in the deal in 2015 were a masterpiece of international diplomacy, but there are no plans in place to launch new talks.
Trump wants to bring the Iran regime to its knees with sanctions, but domestic political considerations in Tehran make it unlikely that the country will buckle. Leaders who demonstrate weakness in Iran are discarded. It seems more likely that they will close ranks. Iran-supported groups like Hezbollah are likely to pour fuel on the fire of conflicts in Yemen or Lebanon – as close as possible to Israel’s border. Iran presumably won’t pursue the path of extreme escalation, since such a path wouldn’t be beneficial, but it will likely cease allowing observers into the country, stop providing information on its uranium enrichment activities. It will seek to conceal what the West would like to know.
And what are the benefits of Washington’s radical move? There are none. Just chaos where there was once order. Just American capriciousness after decades of stability.
The most shocking realization, however, is one that affects us directly: The West as we once knew it no longer exists. Our relationship to the United States cannot currently be called a friendship and can hardly be referred to as a partnership. President Trump has adopted a tone that ignores 70 years of trust. He wants punitive tariffs and demands obedience. It is no longer a question as to whether Germany and Europe will take part in foreign military interventions in Afghanistan or Iraq. It is now about whether trans-Atlantic cooperation on economic, foreign and security policy even exists anymore. The answer: No. It is impossible to overstate what Trump has dismantled in the last 16 months. Europe has lost its protective power. It has lost its guarantor of joint values. And it has lost the global political influence that it was only able to exert because the U.S. stood by its side. And what will happen in the remaining two-and-a-half years (or six-and-a-half years) of Trump’s leadership? There is plenty of time left for further escalation.
Every Wednesday at 11:30 a.m., senior DER SPIEGEL editors gather to discuss the lead editorial of the week and ultimately, the meeting seeks to address the question: “What now?” Simply describing a problem isn’t enough, a good editorial should point to potential solutions. It has rarely been as quiet as during this week’s meeting.
Europe should begin preparing for a post-Trump America and seek to avoid provoking Washington until then. It can demonstrate to Iran that it wishes to hold on to the nuclear deal and it can encourage mid-sized companies without American clients to continue doing business with Iranian partners. Perhaps the EU will be able to find ways to protect larger companies. Europe should try to get the United Nations to take action, even if it would only be symbolic given that the U.S. holds a Security Council veto. For years, Europe has been talking about developing a forceful joint foreign policy, and it has become more necessary than ever. But what happens then?
The difficulty will be finding a balance between determination and tact. Triumphant anti-Americanism is just as dangerous as defiance. But subjugation doesn’t lead anywhere either – because Europe cannot support policies that it finds dangerous. Donald Trump also has nothing but disdain for weakness and doesn’t reward it.
Clever resistance is necessary, as sad and absurd as that may sound. Resistance against America.
Europe can no longer count on the US in defense and must take matters into its own hands, German Chancellor Angela Merkel stated during a meeting with French President Emmanuel Macron, who also said: “Something should be done.”
“It’s no longer the case that the United States will simply just protect us,” Merkel said in a speech honoring President Macron, who came to Aachen to receive the prestigious Charlemagne Prize. Receiving a round of applause, Merkel stated: “Rather, Europe needs to take its fate into its own hands. That’s the task for the future.
Europe has to “act together and speak with one voice,” she said, as cited by Germany’s Die Welt newspaper. “But let’s be honest: Europe is still in its infancy with regard to the common foreign policy.”
Speaking after Merkel, Macron said that “We should not be waiting, we must do something right now. Let us not be weak,” added the French president.
Last year, Merkel had made a similar statement, urging Europe to become less dependent on its transatlantic ally. “The times in which we could completely depend on others are on the way out. I’ve experienced that in the last few days,” she told a crowd a day after attending the G7 summit in Italy.
The German chancellor, who secured her fourth term earlier this year, reiterated that Europeans “must really take our destiny into our own hands, of course in friendship with the United States, in friendship with Great Britain, with good neighborly relations wherever possible, also with Russia and other countries.”
Nevertheless, countries within the EU “have to know that we have to fight for our future and our fate ourselves as Europeans.”
Merkel’s statement comes shortly after US President Donald Trump announced his decision to withdraw from the 2015 Iran nuclear deal, prompting a backlash from members of the accord, including Germany. On Wednesday, the German chancellor said: “We will remain committed to this agreement and will do everything to ensure that Iran complies with its obligations.”
While Merkel avoided openly criticizing Trump, German Foreign Minister Heiko Maas earlier accused the US leader of “not insignificantly throwing back the efforts to bring stability to the region.”Describing Trump’s decision as “incomprehensible,” Maas said the move would undermine confidence in international treaties.
On Thursday, he reiterated that it is crucial for Iran to stick to its obligations under the international nuclear deal, and that Moscow should use its influence on Tehran in this regard. Speaking after talks with Russian Foreign Minister Sergei Lavrov, Maas also said that Berlin and Moscow agreed that the Iran nuclear agreement should be upheld.
Moscow recently said it believes that there are ways to guarantee continued cooperation between Iran and the other parties to the deal despite Washington’s attempts to disrupt it. “There are means to guarantee that this cooperation would continue despite the attempts to deter it,” the Russian Deputy Foreign Minister Sergey Ryabkov said.
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