America’s ‘exorbitant privilege’ is Europe’s sin of omission
My frequent criticism of the EU’s policies is matched only by my admiration for its founding fathers.
In his declaration of May 9, 1950, Robert Schuman, the French foreign minister, included a pearl of wisdom on which today’s leaders would do well to reflect, at a time of important decision-making after the European elections.
He wrote that world peace required “creative efforts proportionate to the dangers which threaten it”. The history of the EU mirrors the rise and fall of political creativity.
There are similarities between today and 1950. Europe is once again caught in the middle of an east-west conflict. The EU cannot meet its security interests in the form of blunt nation-state devices, such as a single European army under a common command structure. France killed off that idea in 1954, when it refused to ratify a proposal for a European Defence Community.
The most creative thing the EU can do in the current circumstances is to leverage the instruments it already has, and turn them into geopolitical tools. Among such instruments, none is more potent than the euro, especially if combined with a deep capital markets union and a pan-eurozone treasury bond and treasury bills. If there is one reason to keep the euro, this is it.
It was the dollar’s leading global position that gave the US an “exorbitant privilege” as Charles de Gaulle, the former French president, put it so memorably. By the phrase he meant a power that extends far beyond what could reasonably be expected.
De Gaulle had a much deeper understanding of the link between the international role of a currency and geopolitical power than the current generation of European leaders. It is interesting to speculate as to what he would have done had such an instrument as the euro been at his disposal.
The diplomacy behind the collapse of the Iran nuclear deal is a good example of how financial instruments are used in 21st-century foreign policy.
When Donald Trump pulled out of the deal last year, he imposed sanctions both on Iran and on any companies from other countries that do business there.
The US president was able to do this because he has the power to cut off foreign companies’ access to US capital markets and from dollar transactions — including most of those that take place outside the US.
France, Germany and the UK made a vacuous response to this very real threat: they created Instex, a special purpose vehicle to protect European companies threatened by the sanctions. The idea sounds impressive until you look more closely at Instex, and find that it is without substance.
International European companies simply cannot afford to cut themselves off from dollar markets, not even if they were to be promised compensation for the loss of their business with Iran. The banks that lend to them cannot do so either. Instex is a dysfunctional insurance vehicle for small carpet traders — a fitting symbol of EU foreign policy.
The reality is that the EU has no effective policy instruments to defend itself against secondary US sanctions. There is no deep European capital market that would allow the EU to retaliate by blocking US companies and their banks. Of course, if the eurozone had a large and liquid safe asset, global investors would be able to diversify their dollar holdings, making them less dependent on the US, and reducing its exorbitant privilege.
So far, however, the EU has shown no sign of being interested in doing what it takes to increase its global role, preferring to blame Mr Trump. But the sheer extent of American privilege is not his work; it is a sin of European omission.
When the EU created the euro in the 1990s, it could have chosen to endow the common currency with an infrastructure to share at least a portion of the dollar’s privilege. But that was not a priority for leaders at the time. The job was get it over the line, without any thought of future crises.
Instead of seeking a strong international role, the EU prioritised price stability and fiscal consolidation, without considering the wider consequences of such a narrow range of goals. As a direct result of those choices, we now associate the word “euro” with “crisis” rather than “success”.
An additional problem is the EU’s large and persistent trade surplus with the rest of the world. Being dependent on others to buy your export surpluses and invest your excess savings makes you more vulnerable in a conflict.
So what would Schuman do in this situation? I like to imagine that he would not focus so much on who is going to be the next president of the European Commission. More likely, he would recognise that the EU has a problem, and that it needs to show both courage and creativity to address it.