Europe’s Quest for Financial Independence

On Monday, France and Germany each gathered all of their ambassadors for their annual meeting in Berlin and Paris. In their opening speeches, French President Emmanuel Macron and German foreign minister Heiko Maas delivered markedly synchronized messages. Faced with the prospect of ​“America first” across the Atlantic, both resolved to invest in building ​“a sovereign Europe” that can assert itself. And both talked about ​“new alliances” to breathe new life into a multilateral order under assault by Trump. A French president pushing for greater independence is nothing new. But a German foreign minister calling for ​“a new, balanced partnership with the U.S. in order to regain our own leeway” is unheard of. What makes Maas’ intervention even more remarkable is that beyond the standard talk about military capabilities, he discussed two concrete areas of action: developing payment systems independent of the dollar to give Europe financial sovereignty and building an ​“alliance of multilateralists.” ​“Where the U.S. crosses the line,” Maas said,“we Europeans must form a counterweight — as difficult as that can be. That is also what balance is about.” This approach seeks to protect Germany and Europe against hegemonic overreach on the part of the United States and other powers. It is a direct reaction to the U.S. decision to weaponize the rest of the world’s financial and technological dependence on the United States.

Maas’ and Macron’s push for European autonomy is a long shot. Lack of unity and political will within the EU could doom it from the outset (not least because many in Europe see Germany as a hegemon and want to balance against it). And U.S. efforts to divide Europeans and preempt their quest for autonomy might succeed. But it is the only sensible path to take if Europe wants to assert itself in a hostile world.

The Trump administratin’s actions have shown Europeans their vulnerabilities as few other things have done. Europe has long regarded itself as strong when it comes to trade and finance. The single market with 500 million consumers and common rules, European leaders believe, is the reason why the EU is taken seriously in Beijing, Moscow, and Washington.

So it was something of a shock to EU elites when the Trump administration’s withdrawal from the Iran nuclear deal, also known as the JCPOA, exposed the bloc’s helplessness in international finance. The EU regards the JCPOA as its signature foreign policy achievement. The Trump administration is using the might of the dollar to crush it. It has imposed secondary sanctions on any company doing business with Iran and seeks to cut off Iran from the international payments system SWIFT.

The United States has done this before to squeeze Iran. The difference is that back then the EU went along, since it saw this as in its interest as well. But now that Europeans see value in the nuclear agreement, they are confronted with their own weakness. The EU did activate its blocking statute to try to compel its own companies not to comply with U.S. secondary sanctions. But big international European companies, such as the German industrial firm Siemens and the French oil company Total, will always choose access to the U.S. market over doing business with Iran.

Nor can the EU keep Iran within SWIFT. The payment system is technically based in Europe, but it is at the mercy of Washington’s dollar dominance. In May, French economics minister Bruno Le Maire asked, ​“What can we do to give Europe more financial tools, allowing it to be independent from the United States?” Maas has answered his question by calling for the EU to establish ​“payment channels independent of the US, a European monetary fund and an independent SWIFT system.” But Maas himself acknowledged that the ​“devil is in thousands of details.”

According to a report by the German weekly Die Zeit, senior officials from the chancellery, finance, economics, and foreign ministries have started meeting in order to figure out concrete options and then coordinate with EU allies. This is work best done in the background. Yet keeping everyone on board willbe tough, since many EU countries see setting up independent payments systems as a risky move. The United States will certainly try to convince wavering EU leaders to oppose the idea. Even within Germany, many players, including the central bank and state-owned banks that depend on funding from U.S. financial markets, will be unwilling to run the risk of alienating the United States. Already, perhaps in response to U.S. pressure, the German central bank has announced steps that will make it harder for Iran to access some 300 million euros that it seeks to withdraw from a German-Iranian bank in Hamburg.

However successful the effort eventually is, Europe cannot set up independent payment systems in time to forestall U.S. oil sanctions on Iran, which will begin to bite on November 4. To keep Iran afloat, Europe will have to rely on China, which can step up its purchases of Iranian crude oil using its independent payment channels.

The European push for financial independence makes a 2016 speech by U.S. Treasury Secretary Jack Lew remarkably prescient. He warned of the risks of sanctions ​“overreach” and ​”overuse.” He argued that if other countries feel that the United States was deploying sanctions ​“for inappropriate reasons — secondary sanctions in particular — we should not be surprised if they look for ways to avoid doing business in the United States or in U.S. dollars.”

This is exactly what is happening today. When countries see the U.S. finance system not as a public good but a geopolitical tool that Washington wields unilaterally, they will take steps to reduce their exposure to it. Europe is late to the game since it had mostly aligned itself with the United States over sanctions. But now that it has decided to challenge U.S. supremacy, its financial and economic size and the potential of the euro as an alternative to the dollar mean that its actions will matter.

To succeed in its balancing efforts, Europe needs allies. That is why Maas’ reference to an ​“alliance of multilateralists” is much more than the standard German lip service to international cooperation as an end in itself. Maas explicitly imagines an ​“alliance of countries that defends existing rules together and continues to develop them where this is necessary” and ​“that shows solidarity when international law is trampled underfoot on each other’s doorsteps.” He has already reached out to Canada and Japan and this loose alliance is, he says, ​“open to all those who firmly believe in multilateralism.” Yet already there is trouble among the friends. The German government failed to issue a solid statement of support with Canada in response to Saudi Arabia’s aggressive actions over the past few weeks, even though Canadian Foreign Minister Chrystia Freeland was the guest of honor at the reunion of German ambassadors in Berlin this Monday. That was a bad start for an alliance that aims to shield the multilateral system from the destructive ambitions of the Trump administration.

Maas’ proposals add substance to German Chancellor Angela Merkel’s call in early 2017 for Europe to take its fate more into its own hands. His vision of financial independence is designed for a world in which Europe faces not only China and Russia as authoritarian challengers but also a United States that for the time being has traded its role as a benign hegemon for the ugly face of ​“America first.” Balancing against the United States is a sensible strategy. But not everyone in Germany is on board. Some hope to return to a bygone era of transatlantic coziness after Trump leaves office and regard a balancing approach as too confrontational. Meanwhile, nationalists on both the far left (Die Linke) and the far right (Alternative für Deutschland) suggest aligning Germany with Moscow or Beijing in order to balance against the United States. But neither approach offers a viable alternative to investing in European autonomy. What’s more, in Macron’s France, Germany has a partner driven not, as France used to be, by an ideological quest for grandeur but by pragmatism.

There are plenty of reasons to believe that Germany and the EU will not pull off the creation of a more capable and autonomous Europe. But that is not a reason not to try. If Europe succeeds, it will gain greater clout for itself. And if financial independence is combined with stronger military capabilities, it will also become a better partner for the United States. Any sensible U.S. administration will prefer self-confident partners with their own capabilities to whiny free riders.

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This commentary was originally published in Foreign Affairs on August 31, 2018.