After the violence that blighted Capitol Hill this month, Joe Biden’s inauguration on Wednesday will be accompanied by sighs of relief across much of Europe.
The impending departure of Donald Trump has been welcomed in Brussels as an opportunity for a “new agenda for transatlantic and global co-operation” on topics including Covid-19, bilateral trade, biodiversity, 5G technology and artificial intelligence.
But for all the hopes of a new era following the bitterness of the Trump years, European leaders have by no means ditched their ambitions for greater EU “strategic autonomy” in an age of great power rivalry.
To the evident irritation of Biden aides, the EU at the end of last year struck a deal with China on a new investment treaty. And on Tuesday, the European Commission will sign off on a paper spelling out Brussels’ determination to curb Europe’s exposure to Washington’s ability to weaponise the US dollar.
Officials are well aware of the awkward timing of a paper decrying the “vulnerabilities in the dollar-dominated international financial system” one day before Mr Biden’s inauguration.
But they insist the EU needs to prove it can stand on its own feet despite the impending rapprochement with Washington. China is broadening its global economic power and political clout, while the US is internally divided and prone to violent changes of political direction. Mr Biden may be a far more amenable partner than Mr Trump, but no one knows who will follow the 46th president.
“The Trump years highlighted our vulnerabilities, and we need to address those even if he’s gone,” says one EU official.
Achieving that goal will be far from easy. The draft paper, seen by the Financial Times, argues the bloc needs to reinforce its strategic autonomy by promoting the international role of the euro, boosting EU capital markets and financial infrastructure and curbing its vulnerability to US sanctions.
Europe, it argues, is overly dependent on non-EU financial institutions including investment banks, while financial markets are “too reliant on the US dollar to cushion financial tensions and stability risks”.
The draft devotes a lot of attention to the sanctions issue — channelling the deep-rooted frustrations in EU capitals, notably Paris, that the bloc could not do more to assert its independence from the Trump administration’s hawkish policy towards Iran.
It even floats the idea of vetting foreign takeovers of EU companies against the risk that they would wed the bloc to another country’s sanctions policy.
Meeting the heady strategic ambitions spelt out in the paper will be a formidable task, however. The EU has for example long sought to bolster the international role of the euro, which is the second most important currency globally after the dollar.
It now hopes that the creation of a €750bn recovery fund based on massive commission borrowing will “support a larger international investor exposure to the EU”, boosting market liquidity and the euro’s attractiveness.
But a report from the European Central Bank last summer found that the euro’s share across various indicators of international currency use was still hovering close to historical lows.
Mr Trump’s aggressive use of US sanctions has exposed how difficult it is for the EU to escape the dollar’s reach. The US president’s Iran sanctions had direct implications for the EU-based Swift payment messaging system, as well as Euroclear and Clearstream — institutions that are a core part of the EU’s market infrastructure for the settlement of trades.
The EU has struggled with its Instex payment channel, which was intended to provide a way for European trade with Iran to circumvent US sanctions.
That is not an argument that the US dollar’s hegemony will last forever. In particular, the rapid development of digital alternatives to cash promises to shake up the global financial system in unpredictable ways.
But like it or not, Europe is likely to remain heavily exposed to shifting political winds on the other side of the Atlantic — both favourable and damaging.
A surge in Covid-19 cases and lockdowns across Europe has triggered renewed fears about the bloc’s economic prospects. Sectors such as travel and retail have all taken a hit in the early weeks of the year, indicators show. (chart via FT)
European affairs ministers will hold discussions on Monday, as will eurogroup finance ministers.
On Thursday, EU leaders will hold a videoconference to discuss the bloc’s response to the Covid-19 crisis. Among the topics up for discussion is the question of vaccination certificates for travellers who have received the jab. The issue is likely to prove controversial given the early stage of the vaccine rollout and the risk of divisions between vaccine haves and have-nots.