After the War of Independence, America’s efforts for establishing a central bank continued for many years. The country finally succeeded in its efforts on December 23, 1913. The central bank was named the Federal Reserve System, also known as the Fed.
The United States dollar reigns supreme in terms of usage as compared to other currencies of the world. Initially, the US dollar was backed by Gold but the faltering US economy made it impossible for the Fed to live up to its obligation. The relationship between the US dollar and Gold ended in 1971 and the currency lost its appeal.
To stabilise the global confidence in the US dollar the US administration brokered a deal with Saudis in 1974 that global trade of crude oil will only be made in US dollars. In return, the US administration assured the kingdom it will look after its defence interests. It is because of that historic deal that even today when the US has a record trade deficit its currency still dominates other currencies of the world.
In the following years, many countries tried to break the hegemony of the US dollar. Iran threatened to trade oil with gold. The country was repeatedly crushed with stiff economic sanctions on one pretext or the other and therefore its plan could never materialise. Last year Venezuela launched its oil backed Cryptocurrency, but the experiment failed. The country is now mired in an unprecedented political crisis. Lately, China is flexing its muscles to introduce its currency, the Yuan, for global trade but has not met success.
The European Union has emerged as an economic giant and is an undisputed leader in the fields of education, science, technology, healthcare, banking and fintech. Germany, under the leadership of Chancellor Angela Merkel, is the economic powerhouse of the European Union.
Despite its unified strength the EU has yet to muster the courage to challenge the policies of the US administration to safeguard its political and economic interests. Be it sanctions on Russia and Iran or carrying on business with Huawei or efforts for meeting energy demand (Nord Stream Projects) Europe had to toe the line of its ally across Atlantic.
Lately, the European Union has come under fire from the US for facilitating trade with Iran through special purpose vehicle INSTEX. INSTEX was designed to bypass the US economic sanctions imposed on Iran and carry on trade with the country. European industrial giants find Iran to be a profitable trading partner, but are wary of US fines.
The design and implementation of INSTEX and Europe’s decision to proceed on with the Nord Stream pipeline project despite the mounting pressure of the US administration show a shift in the European Union’s geopolitical strategy. It appears that the bloc is now determined to secure its political and economic interests.
The European Union adopted the Euro (€) as a single currency on 1 January 1999. It is the second global currency (US dollar is the first), but its market share of the global economy is just 20%. Not all countries of the EU use Euro, but those that do are the ones who occupy the corridors of power of the European Union.
Reuters (13 February 2019) reports that the EU is mulling to promote Euro for oil and commodities trading. The Commission has formed a working group comprising executives of European oil and gas firms (OMV, Eni, Fluxys, Engie and others) to debate on this proposed initiative and devise a strategy for its implementation.
Reuters (13 February 2019) quotes the following from the group’s materials for the meeting:
“The EU is the world’s largest energy importer with an annual energy import bill averaging 300 billion Euros in the last five years. Roughly 85 percent of this amount is paid in US dollars”.
The news publisher also quotes a member from the working group saying,
“Washington doesn’t like cartels like OPEC. But then how can you have one market dominated by one currency – the dollar.”
Will Europe walk the talk?
Since the 1974 pact with Saudis, which made US dollar the de facto currency for oil, no country could change the status quo.
Middle East is a powder keg where 34-year-old Saudi Crown Prince Mohammad Bin Salman plays his own version of “Gunfight at the O. K. Corral”. The brutal chopping of Jamal Khashoggi (a journalist at The Washington Post and a Saudi dissident) done by the Saudis on Turkish soil last year has created further tensions in the Middle East. The US administration did a favour to the Saudis by deciding to look the other way. For this, the Saudis are indebted to the Americans and will listen to whatever they say.
Considering the present geopolitical situation, it is next to impossible for Europe to promote Euro for the trading of oil