Smarting from a record fine on its largest bank, France wants the dollar dislodged as the global default currency.
- By Jamila TrindleJamila Trindle is a senior reporter who covers finance, economics and business where they intersect with national security and foreign policy. Her beat spans everything from the economic underpinnings of conflict to sanctions, corruption and terror finance. Before coming to Foreign Policy magazine, Jamila reported for the Wall Street Journal’s Washington bureau, covering financial regulation and economics. She has also worked as a foreign correspondent in China, Indonesia and Turkey as a freelancer for NPR, Marketplace, The Guardian and others. She moved back to the U.S. to cover the post-crisis economy for PBS in 2009.
Just days after watching its largest bank agree to pay the United States an eye-popping fine, France thinks China and Russia are on to something with their calls for doing deals in other currencies besides the dollar as a way of minimizing Washington’s outsized influence on the rules of global finance.
Like Russian President Vladimir Putin when he found himself the target of U.S. sanctions over Ukraine, French Finance Minister Michel Sapin lashed out Sunday, July 6, about the dollar’s status as the world’s default currency. Sapin’s call for rebellion against the ubiquity of the dollar comes after France’s biggest bank, BNP Paribas, was socked with a record $9 billion fine last week for violating U.S. sanctions against Sudan, Iran, and Cuba.
For countries that want to avoid the long arm of U.S. law, it’s an appealing idea. The dollar’s dominance in international trade and finance allows the U.S. government to interfere in transactions that don’t involve its citizens. A foreign bank routing money from someone in Japan to someone in Russia has to comply with U.S. laws, including sanctions, if it does so in dollars. Ergo, Putin, China, and now Sapin have a simple solution: avoid U.S. dollars — avoid U.S. prosecutors. But it’s not that easy.
Governments and markets rely on the U.S. dollar as the reserve currency not by mandate but by preference. Because the dollar is seen as stable and liquid, people choose to deal in dollars instead of local currencies. The greenback was on one side of 87 percent of foreign exchange transactions in 2013, according to the Bank for International Settlements.
Even in the case of BNP, choosing another currency probably wouldn’t have gotten the bank out of trouble. BNP’s U.S. operations, including investment-banking offices and 700 retail branches, hold it answerable to U.S. law regardless. Still, Sapin sees the bank’s Justice Department-imposed penalty as proof that Europe needs to push for broader use of the euro.
"We [Europeans] are selling to ourselves in dollars, for instance, when we sell planes. Is that necessary? I don’t think so," Sapin told the Financial Times. "I think a rebalancing is possible and necessary, not just regarding the euro but also for the big currencies of the emerging countries, which account for more and more of global trade."
But it’s unclear how the French government, which is still struggling to right its own economy, could unseat the U.S. dollar.
"Not sure there is much the French (directly or through the EU) can do about that," Harvard Law School professor Hal Scott said in an email. "Short of requiring contracts of Europeans to be denominated in euros, hard to imagine them doing that."
Putin also tried to turn the Russian economy away from the dollar after the United States imposed sanctions as a cudgel to expel him from Ukraine’s Crimean peninsula. Washington froze the assets of 45 people, including some of Putin’s closest allies, and 19 banks and companies. When Visa and MasterCard stopped serving the blacklisted Russian banks, Putin called for a national system and threatened to eject the worldwide payment giants. But the effort to create a Russian replacement, which is expected to be long and expensive, quickly hit snags. The Kremlin has since softened its stance toward Visa and MasterCard in an effort to get the companies to join up with much less established local partners.
In May, Putin also inked a $400 billion deal to sell natural gas to China while visiting Shanghai. The long-awaited gas contract, as well as a separate agreement to use local currencies instead of the dollar, sparked concerns about a rising Moscow-Beijing economic alliance beyond the reach of Western influence — and financial pressure.
"The problem is the lack of a compelling alternative," Marc Chandler, global head of currency strategy at Brown Brothers Harriman, wrote on his website.
"When the euro was first launched, many argued … that this was the first alternative to the dollar and business and investors would jump at the opportunity," Chandler continued. "They really haven’t."
The use of greenbacks is actually on the rise. The percentage of transactions involving dollars on one side increased from 85 percent to 87 percent between 2010 and 2013, while the percentage of transactions involving euros fell from 39 percent to 33 percent. The use of the Chinese renminbi, which some have advocated as a replacement for the dollar, is up — from 1 percent to 2 percent between 2010 and 2013.