The United Kingdom’s definitive exit from the European Union and the launch of the Next Generation EU Recovery Plan are opportunities to strengthen the role of the euro on the international stage, according to the European Commission in a communication unveiled on Tuesday 19 January.
To achieve this, the European institution recommends targeted actions in three areas: – promoting the use of the single currency in global finance and as a reserve currency; – enhancing the resilience of market infrastructures in the EU; and – uniformly applying the European sanctions regime in the field of foreign affairs.
With Next Generation EU, the European Commission will borrow up to €750 billion on the markets, making the EU “a major player in the financial markets”, Vice-President Valdis Dombrovskis considered. And “30%” of the securities issued as part of the European Recovery Plan will be ‘green bonds’, according to the Commissioner for Economy, Paolo Gentiloni.
Questioned by EUROPE, Mr Dombrovskis admitted that the EU was entering hitherto unexplored territory in this way, which will inevitably strengthen the role of the euro through massive, temporary, but very long-term issuances. However, he did not want to get stuck on terminology, calling future securities issued as Eurobonds. According to Mr Gentiloni, the securities issued will be ‘safe assets’ and, even if it results from an extraordinary decision, this step “could be a good example for the future, if it works”.
Among other initiatives identified, the Commission will continue to support the development of euro-denominated financial derivatives in both commodity and energy markets. Between 2018 and 2020, the share of gas contracts signed in euros rose from 38% to 64%. Another avenue mentioned was the medium-term creation of a digital euro, with the creation of an ad hoc working group with the ECB (see EUROPE 12595/3).
Reducing dependency on foreigners
Furthermore, the European institution wants to protect the critical infrastructures of its financial markets, such as stock exchanges, banks, central counterparties and central securities depositories, from interference from abroad.
One of its main concerns is the huge quantities of euro-denominated contracts that are cleared and settled by central counterparties (CCPs) outside the EU and especially in the UK.
The European Commission has, for the time being, granted an equivalence decision to the UK central clearing houses, through 30 June 2022, allowing them to continue to clear transactions in euros for customers based in the EU (see EUROPE 12564/9). The decision was taken to give more time to EU CCPs to develop their capacity to clear the transactions concerned.
“On central counterparties, the fact that a large proportion of euro-denominated contracts are cleared outside the European Union is a point of vulnerability. And the message to the industry is clear: financial entities in the EU are expected to reduce their exposures to UK CCPs, and CCPs within the EU must build up capacity”, stressed the European Commissioner for Financial Services, Mairead McGuinness.
The Commission will therefore set up a working group to assess possible technical problems related to the transfer of contracts denominated in euro or other EU currencies to CCPs established in the EU. The impact on the real economy will also be taken into account, she says, announcing recommendations by mid-2021.
More broadly, the Commission, in cooperation with the ECB and the European Supervisory Authorities (ESAs), will analyse the vulnerabilities of market infrastructure firms regarding the illegal extraterritorial application of unilateral measures taken by third countries in order to take action to address these vulnerabilities.
The Commission will also explore ways to ensure the uninterrupted flow of essential financial services, including payments, to EU entities or persons targeted by the extraterritorial application of unilateral sanctions by third countries. The objective is to improve the effectiveness of instruments such as the Instrument for Supporting Trade Exchanges (INSTEX) to facilitate payments related to legitimate trade between the EU and Iran.
The Commission states that it will examine “additional policy options to further deter and counteract” the application of extraterritorial measures, including amending Regulation 2271/96, better known as the ‘blocking law’. The latter is currently being used to counter US measures against Iran.
This could include clarifying the procedures for natural and legal persons to recover in court any damages suffered as a result of such extraterritorial measures, and strengthening national measures to block the recognition and enforcement of foreign decisions and judgments based on extraterritorial measures. The Commission is considering intervening in foreign proceedings to support EU companies and individuals.
Strengthening cooperation on international sanctions, in particular with G7 members, including the United States, is another area of work.
Strengthening the implementation of European sanctions
The Commission also proposes strengthening the implementation of EU sanctions. The Commission will therefore develop a database, the ‘Sanctions Information Exchange Repository’, in order to enable rapid notification and exchange of information between Member States and the Commission on the implementation and enforcement of restrictive measures. It also envisages that single contact points be identified in the Member States to strengthen the enforcement of European sanctions, including their cross-border dimension. Finally, a system will be put in place to allow anonymous reporting of cases of circumvention of sanctions, including the issuing of alerts.
See the communication: https://bit.ly/3iqrP2e (Original version in French by Mathieu Bion, Marion Fontana, Camille-Cerise Gessant)