WASHINGTON (Reuters) - Europe must raise the international profile of its euro currency to protect itself from the domination of a “weaponised” U.S. dollar and help stabilize the international monetary system, the chairman of euro zone finance ministers Mario Centeno said.
“Washington’s inclination to use the dollar as a tool to complement the effect of economic sanctions and serve a narrow domestic agenda is a source of concern,” Centeno told the Reinventing Bretton Woods Committee in Washington on Friday.
“The foundations of the international monetary system are wobbling, as currencies are used to advance national interests that are narrowly defined. For some observers, the system in which the dollar holds a dominant and unrivalled position is on the cusp of reformation,” he said in a speech.
The European Union started thinking about increasing the role of the euro last year after U.S. President Donald Trump decided to abandon the 2015 deal under which international sanctions on Iran were lifted in return for Tehran accepting curbs on its nuclear program.
The U.S. move, though unilateral, means European companies also cannot trade with Iran, fearing they would be cut off from U.S. markets and the international payments system in retaliation.
Centeno said the world could be heading toward a multi-currency system in which the dollar would vie for dominance with others, notably the euro and the Chinese renminbi.
He said such a multi-polar currency system could improve the functioning of the international monetary system and would be less prone to the economic fluctuations of the dominant dollar by offering options to diversify currency reserves.
The euro is used in around 36 percent of international payments, just behind the dollar with almost 40 percent, but when it comes to foreign exchange trading 44 percent is in dollars but only 16 percent in euros, Centeno said.
The favorite for currency reserves is the dollar with a 62 percent share of global reserves, while the euro has a 20 percent share.
“In Europe there is a growing concern that we are exposed to the risk that the power of the dominant dollar can be used against our best interests. The obvious consequence of ‘America First’ is that others will come second, at best,” Centeno said.
“The feeling is that we can only rely on ourselves and our currency. And this is behind repeated calls to strengthen the international role of the euro,” he said.
Centeno noted however, that to achieve a stronger role, the euro zone needed to tackle many tough issues about the design of the single currency.
He said the 19 countries sharing the euro had to first complete their banking union, by agreeing on a European deposit insurance system and setting up a capital markets union.
Other needs include a budget for the euro zone, under discussion now, and creating a euro zone safe asset - a debt instrument backed by all euro zone countries - with a sufficiently deep and liquid market, an idea that now faces very strong opposition from several key euro zone countries.
Reporting By Jan Strupczewski; Editing by Andrea Ricci