The Strategist

Is it possible for Euro to replace Dollar?

09/20/2018 - 14:54

Next year, the euro will turn 20 years old. Despite the years of crisis, the single European currency is more important than any other national European currency after the end of World War II. Even countries that are not part of the euro area sometimes accept the euro as an alternative means of payment.

However, the value of the euro is small compared with some other currencies, namely with the dollar. So, oil is traded for dollars, and about 60% of global financial turnover falls on the American currency in general. For example, South Korea, Canada, Japan and Australia, according to economist Gita Gopinath, paid more than 80% of their exports in US dollars. And central banks of the most different countries of the world are saving their foreign exchange reserves mainly in dollars.

The fact is that for many years all the participants of the global market, be it countries or companies, were satisfied with this state of affairs. However, in recent years, many have become discontent and openly raised the question of the need for certain changes. German Foreign Minister Heiko Maas said, for example, that Europe should soon become more independent of America, including in the monetary and financial aspect. The reason for this was the aggressive behavior of the US administration under President Donald Trump, who is actively trying to use the dollar as a foreign policy tool. In particular, this is evidenced by Washington's withdrawal from the "nuclear deal" with Iran.

The new sovereignty

However, long before Trump's arrival in the White House, China set a goal to increase the renminbi’s role in the world, in particular, in international trade operations involving companies from China, including the issue of oil trade. And Trump's policy, undoubtedly, only reassured Beijing in correctness of its decision.

President of the European Commission Jean-Claude Juncker, too, spoke in favor of strengthening the European currency. "The euro should become the face and instrument of a new European sovereignty," he said on Wednesday during a speech in the European Parliament, adding: "It is completely pointless that the EU pays 80% of its imports (300 billion euro per year) in dollars. At that, only 2% of imports fall on the US".

Thus, Junker suggested that importers in Germany, France or Spain in the future pay for oil or gas in euro, not in dollars.
The EC President also cited another example: "It's absurd that European companies pay for European planes in dollars, not in euro." He promised to send out proposals on strengthening the international role of the European currency before the end of this year.

It is obvious how important the currency is. All we need to understand it is just to take a look at the energy industry, since all EU countries are energy importers. They produce too little energy to cover their costs on their own. According to statistical data, this number averages 54% for the EU. The reason for this is the strong dependence on foreign energy carriers (oil and gas).

Despite all efforts to develop alternative fuels, the transport sector depends on gasoline and diesel fuel most of all (more than 90%). However, industrial enterprises and private households also depend on imported gas by more than a third.

Let’s take Germany, for example. The country has almost no own oil reserves. It buys fuel in a total of 33 countries, and Russia is the main supplier with a huge margin. It is followed by Norway and the United Kingdom. According to statistics, these three countries account for two-thirds of Germany's total oil imports.

As for gas, Germany is a major importer not only in Europe, but throughout the world. 10-20 years ago, its own reserves reached 15-20%, but now they have been reduced to incomplete 10%. Germany buys gas in Norway, Russia and the Netherlands, and reserves of the neighboring country will come to naught in just a few years.

Russia managed to generally confirm its role as the main supplier of oil and gas to the EU, despite a slight decrease in its share in recent years. According to the Eurostat, its share in oil supplies has averaged 25-30% in recent years. Norway had only about 11%, followed by Libya. In addition, Russia supplied about 30% of gas to the EU. The second place was also taken by Norway (about 25%). Thus, Russia and Norway, along with Algeria (the third largest supplier of the EU) covered two-thirds of Europe's gas needs.

The numbers suggest that theoretically Europeans may well insist that energy supply contracts are more often concluded in euro.

However, if Europeans really want to strengthen the euro against the dollar in the long run, then these measures will not be enough. Along with this, it is necessary to create the largest and most accessible financial market for all those wishing to actively participate. It is also very important for the oil and gas sector to conclude relevant liquid futures contracts in euro, as well as to trade hydrocarbons in Europe precisely in the European currency (now Brent and WTI are traded in dollars). In addition, many forget about strengthening of military power, which the Americans already have, and the Chinese are constantly increasing.

In the end, now the monetary union is in much better condition than a few years ago, when many had doubts about its very existence. For comparison, no one has expressed such doubts about the US or China. President of the European Commission is of course aware of it. According to him, the European financial crisis has largely been overcome. Yet now it is necessary to finish work on the economic and monetary union. "Without this, we will lack convincing arguments in order to add the weight of the euro in the international arena," he warned.