The Strategist

EC proposes increasing number of energy transactions in euros

03/26/2019 - 16:22

On March 31 the European Commission (EC) will complete collection of expert opinions and positions of EU countries on the draft initiative aimed at increasing share of the euro in payments for energy transactions. Attempts to oust the dollar from the EU gas market can be used as a way for EU companies to withdraw from US sanctions against Iran and, possibly, Russia. However, the European Central Bank does not directly support the EC initiative.

The European Commission confirmed that on March 31 it is completing collection of opinions on the initiative to strengthen role of the euro in the oil and gas transactions of the EU member states. European Commissioner for Climate Action and Energy, Miguel Arias Cañete first announced this idea at the beginning of December 2018. However, the draft was not published, and the dates for discussion were not mentioned. Mr Cañete made a rather strong call in Brussels to adjust enforcement mechanisms of the 2017 EU Intergovernmental Agreements (IGAsD). As part of this decision, the commission recommended that EU member states increase use of the euro in intergovernmental agreements both within the EU and with third countries. The powers of the Spaniard Cañete in this post expire this year, but the topic of the “energy union” in the EU is also supervised by Vice-President of the EC Maroš Šefčovič. Miguel Arias Cañete, previously a politician and Minister of Agriculture of Spain, has been mainly engaged in the “climate agenda” and renewable energy in the EU since 2014; he is also a member of the European Commission’s project offices on EU energy union, on economic regulation, on budget and labor market. However, his speech on December 5 was mainly focused on the fact that the EU imports 34% of energy from the Russian Federation, 33% - from the Middle East and North Africa, 20% - from Norway, and only 2% - from the US. However, 85% contracts for the EU’s annual energy import, worth € 300 billion in total, are denominated in dollars. This creates two problems: currency risks of European fuel and energy companies and problems with payment between EU countries and third countries, which may be limited by the United States if sanctions are imposed on EU counterparties. The European Commissioner stressed that payments for energy carriers made in euro will strengthen the European currency’s role as the second global reserve currency.

It should be noted that the European Commission is not authorized to tell any EU member or euro zone participants what currency they should use in external transactions. Thus, a part of payments for gas supplies from the UK to the EU countries are made in pounds; in turn, Norway (not a member of the EU, but a participant in several economic association agreements with the EU) receives part of the payment for gas in euros and pounds to serve imports from the UK. But the exit of the UK from the UK creates a a good time for the “redrawing” of the zones of influence of world currencies in 2019. All this is also facilitated by growing tension in the EU due to future increase in dependence on the US in the supply of liquefied natural gas.

However, the payment infrastructure in the dollar commodities market lasts longer and is well developed. Creation of its own scheme will cost the EU quite a lot of money. This can be the reason why the euro issuer, the ECB, has refrained from commenting on expansion of euro settlements in recent years. By itself, the role of the euro in world trade is determined by EU imports, by the state of European banks in comparison with the US banking system - and the EU and the euro zone are unlikely to gain anything in the coming years from an increase in the share of the euro in European fuel and energy sector calculations.