The European Commission will present a new proposal this week to settle energy contracts between European countries and with other countries in euro by default. In addition, a new price benchmark for oil is being considered, which will also be quoted in euro. With these measures, European countries try to reduce their dependence on the dollar and strengthen the role of the euro as an international trade currency.
The European currency has been used since 2002 by an increasing number of European countries, even in those countries that still have their own currency. Despite that, energy imports in Europe are still largely settled in US dollars. Earlier this year, Jean-Claude Juncker expressed his displeasure about this fact. He called it absurd that European countries pay 80% of their imports of oil and gas in dollars, while Europe imports only 2% of its energy from the United States.
According to Bloomberg, the plans of the European Commission are aimed at limiting the ‘exorbitant privilege’ of the American dollar. That privilege means that all countries in the world need dollars for international trade, while the United States has the privilege of being able to ‘print’ dollars. This privilege is maintained because oil is still primarily settled in dollars, while oil is one of the most important raw materials in the world.
When European countries jointly decide to pay oil and gas in euro, they become less dependent on dollars. An additional effect is that for all countries that export energy to Europe have more reason to keep a larger part of their currency reserves in euro. In a draft version of the proposal, which was obtained by Bloomberg earlier this week, we read the following statement.
“There is room for the euro to further develop its global role and reach its full potential and reflect its political, economic and financial weight.”
‘Less vulnerable to sanctions’
In a separate document that was also viewed by Bloomberg, there is another interesting statement. The European Commission writes that these measures will reduce the risk of a ‘disruption of energy supplies as a result of actions by third parties’. In other words, by settling oil and gas in euro, they expect fewer problems as a result of any sanctions imposed by other countries.
The European Commission’s plans to put the euro forward as an international trade currency are in line with the wish of several European countries to become less dependent on the United States. The document states that the EU is the largest importer of energy in the world with an annual import of over €300 billion. If these deliveries are all settled in euro in the future, this will give a strong boost to the international role of the currency.
“The recent extraterritorial unilateral actions of third parties, such as the re-imposition of sanctions on Iran and the challenge of international rules-based trade practices are a wake-up call on Europe’s economic and monetary sovereignty.”
In addition to promoting the euro as a currency for settling oil and gas, the European Commission also wants to encourage the use of the euro as a trade currency for African countries.