The most widely discussed issue is security. European states are over-reliant on the US organizing and financing their military capabilities. Less transparent but perhaps even more important is that the international monetary system is effectively in American hands. After Trump’s unilateral withdrawal from the Iran nuclear deal, for example, the US was able to introduce financial sanctions that blocked European firms from doing business with the Islamic Republic. This demonstrates how much Europeans are subject to US power in the field of international money.
The international monetary system is the key infrastructure that enables the global trade in goods and services. It has its center in New York and operates primarily on the basis of the US-Dollar (USD). Europe in general and export-oriented Germany in particular greatly benefit from this infrastructure, but also asymmetrically depend on it. The enclosed schematic sketch of the international monetary system explains why.
We can think of the international monetary system as a hierarchical structure with the USD at the top. The currencies of other monetary systems form a multilayered periphery to it. More central currencies are the Euro (EUR), the Japanese Yen (JPY) and the British Pound (GBP). Further down in the hierarchy, we can find for example the currencies of the BRICS: the Brazilian real (BRL), the Russian ruble (RUB), the Indian rupee (INR), the Chinese renminbi (RMB) and the South African rand (ZAR). These currencies are created by the respective central banks and commercial banks, but also by so-called shadow banks—non-bank financial institutions that perform similar activities like banks but are regulated differently. Central bank money is scarcer than commercial bank money, which in turn is scarcer than shadow bank money—hence the representation as pyramids.
The internationally dominant currencies are also created and used ‘offshore’, outside the actual legal jurisdiction of the home country. Offshore money creation greatly enhances the international outreach of a currency and the ability of the currency’s home country to influence and interfere with other states. By far the most wide-spread offshore currency is the USD. Today’s international monetary system effectively is an offshore USD system, in which various types of banks create US Dollars everywhere in the world, also in Europe. The key roles play the so-called Eurodollar market and the globally entangled USD-based shadow banking system. Since the 2008 crisis, the US central bank stabilizes this system with swap lines to other non-US central banks to deliver USD emergency liquidity to the offshore world if necessary.
The world economy thus is based on a US monetary hegemony, which grants Washington a unique “monetary bullying power”. During the first 500 days in office, President Trump has been exploiting this in his capricious Twitter diplomacy. European monetary unification, the creation of the Euro, has also been driven by the strategic consideration to create a counterweight to the USD. Due to inner-European conflicts, this purpose of the Euro has become largely forgotten in public debates. In the hands of the Trump administration, this monetary bullying power might force the Europeans to rethink its dependency on the offshore dollar system. This should in particular affect the German willingness to invest in the internal cohesion of the Eurozone in order to strengthen the Euro’s role internationally.
About the Author:
Dr. Steffen Murau is a postdoctoral fellow at Weatherhead Center for International Affairs of Harvard University and is currently an Affiliate Scholar at the Institute for Advanced Sustainability Studies, Potsdam (IASS). He recently completed a research project on the past, present and possible futures of the international monetary system. At IFAIR, Dr. Murau is a member of the executive board and responsible for IFAIR's Impact Groups.
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