Financial Times:

US sanctions expose the mistakes made by the founders of the single currency

[In the introduction the author explains how Europe refused to make Euro an instrument of foreign policy]

The dollar, by contrast, has been an integral part of US foreign policy for many years. Its role as the global anchor currency allows the US to cut off an entire country from access to international commerce and finance, as in the case of Iran. Or a group of individuals as in the case of Russia.

...The Bundesbank deliberately rejected the idea of a strong international role for the euro, fearing it might conflict with the objective of price stability. 

I also recall the debates among international economists about whether the euro could challenge the dollar as a global reserve currency. The opportunity was there. Serious academic papers were written. The fact that it did not happen was the result of a conscious political choice. 

That choice is in part responsible for the EU’s difficulty in finding an effective response to Donald Trump today. The biggest problem with the US president’s decision to pull out of the Iran nuclear deal is the extraterritorial effect. European companies that defy the US sanctions would be cut off from US financial and product markets. So would the banks that fund those companies. Multinational companies or banks cannot afford that. Mr Trump can behave in this way because the US is ultimately in control of all dollar-based financial flows, including those that originate outside the US. 

The EU cannot impose extraterritorial sanctions on US companies that defy European policy. The euro is not as critical to them as the dollar is to Europeans. After the euro was introduced in 1999, it quickly became the world’s second most important currency but still lags behind the dollar on most metrics. Its share of foreign exchange reserves was under 20 per cent at the end of 2016, compared with 64 per cent for the dollar, according to the European Central Bank. The gap was of similar magnitude in the categories of international debt and loans. The dollar leads the euro in foreign exchange turnover by a factor of three to one. The only category where the euro has almost caught up is that of a global payment currency. In the past decade the gap narrowed but it has widened again since the financial crisis. 

In response to Mr Trump’s decision to cancel the Iran deal, the European Commission only managed to dig up the old blocking statute — a ban on European companies complying with the sanctions. The problem is that the EU has no financial instruments to protect European companies. How, for example, would you compensate a European bank for no longer being able to transact in dollars?

...

Instead of hyperventilating about Mr Trump, Europeans might want to reflect on what got them into this mess. The EU would be more resilient today if it had not handled the eurozone crisis the way it did, and if its founders had made the euro more robust from the outset. Technically, it would still be possible for the EU to fix the problem, but that would require a degree of political union that goes far beyond even what Emmanuel Macron, the French president, has proposed. It requires at its core a mutualised debt instrument, a euro bond, as a financial instrument to underpin a large sovereign debt market. It would also require a broader mandate for the European Central Bank. 

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