03 July 2014

Paul Goldschmidt: Mr. Sapin, the Euro and BNP

Mr. Sapin, the Euro and BNP

A poorly thought out and incomplete proposal.

The spectacular fine imposed on BNP by the American judiciary for violations of the laws on the embargos concerning several countries (Iran, Sudan, Cuba…) has provoked numerous reactions, in particular from the French Minister of Finance. Without questioning directly the legitimacy of the accusations, one can, nevertheless, detect an underlying feeling of frustration as well as of wounded national pride in his recommendations aimed at developing the usage of the euro in the settlement of international transactions. The proposal is an answer to the legitimate desire to promote the single currency as an alternative to the dollar.

However, the context surrounding its publication, leads one to believe that one of the major objectives is to frustrate American judicial authorities – considered to be excessively intrusive – in their ability to exercise their oversight concerning the legality of payments denominated in dollars. This idea is not only understandable but addresses both a need for the diversification of payment systems (87% of all transnational payments involve the dollar) as well as answering the wishes expressed by numerous operators, to the extent that comparable standards of legal and operational security are met.

However, this does not appear, at present, to be the case for number of reasons:

Unless it is integrated in to a wider framework, the proposal is likely to be considered as an incentive to circumvent the American judiciary which – by initiating legal actions against BNP and other institutions – has asserted its right to control the usage of the national currency, to the extent that the settlement of a transaction is carried out by compensation between institutions located on American soil. This condition is de facto the case for any settlement denominated in dollars (except for payments in bank notes) because “scriptural dollars” have no existence outside of the USA (as is the case for all currencies outside their respective “national” borders and for the euro outside of the Eurozone).

One should therefore, as an example, ask the following question: if the EU were to impose further financial sanctions on Russia because of the Ukrainian situation, would Mr Sapin object to the settlement in € of a transaction between Russia and a third party, unconcerned by the EU embargo rules, and which would necessarily imply the intermediation of a financial institution located physically within the Eurozone? If the answer is yes, it would severely impede the efficiency of the sanctions; if the answer is no, why is there an objection to the intervention of the American judiciary in the BNP case?

A further fundamental difference between the usage of the $ and the € results from the fact that the USA exercise their full sovereignty over their currency while the sovereignty of the € is shared by the 18 EMU Member States. Though “monetary policy” is carried out jointly, mainly by the ECB, many aspects of economic and financial policy as well as the judiciary remain the sole prerogative of Member States.

To create an environment in which € denominated transactions could compete on a level playing field with the $ in terms of operational and legal security, one needs to engineer beforehand significant additional transfers of sovereignty from EMU Members to a “federal” type Eurozone authority, in order that the rules applying to these matters – whether similar or different to those prevailing in the USA – would be applied and enforced uniformly throughout the EMU. I doubt very much that France is ready to back such a development in the present context, in particular in the judiciary aspects.

Short of a detailed “European” consensus, the proposal of the Minister will remain unheeded and will only to contribute to further ensure the domination of the US currency which is, in and of itself, not particularly desirable. In addition, the proposal risks creating new tensions between EMU Members without even giving further thought to the interests of other EU partners, in particular the UK.

Instead of succumbing to an emotional reaction to the specific BNP case, the question of the future role of the single currency within a globalised, interdependent and multi polar world should be considered  within the broader context of the completion of the Economic and Monetary Union.

Brussels, 2 July 2014 

© Paul Goldschmidt