The euro as a secondary actor in the economic cold war between the United States and China

Since 2018, the rivalry between the United States and China has ceased to be rhetoric and has become a war of tariffs, technological blacklists and financial sanctions. Each new round of measures — tariffs on $370 billion in 2018, a veto on Huawei in 2019, restrictions on chip exports in 2022 — has tightened the arc to turn globalization into a battleground. In this scenario, the euro is neither white nor artillery; he is, above all, an observer whose value fluctuates at the pace of the distrust generated by the two giants.

The logic of the conflict has made the dollar the safe-haven asset par excellence; when Washington talks about vetoing software or Beijing responds with export controls on critical minerals, investors flee to the greenback. The immediate result is an appreciation of the dollar which, over the past five years, has led the euro to lose almost 18% of its peak value against the US currency. The single European currency thus becomes a thermometer of war: the higher the geopolitical temperature, the lower its price.

However, the euro has an advantage that no other currency can offer: it eliminates currency risk within an area that generates 15% of global GDP and 30% of international trade in services. For the 19 economies that share it, the U.S. confrontation between the two countries and U.S.-China is an external storm that does not trigger foreign-currency debt crises, like those that hit Latin America in the 1980s. This internal stability allows the European Union to present itself as a neutral space, although in practice its companies depend on value chains that cross both Shenzhen and Silicon Valley.

European neutrality clashes with a reality; 80% of world energy trade and 90% of currency transactions are still settled in dollars. When Washington banned Russia's VTB bank in 2014 and Chinese chipmakers in 2022, it did so by pushing the SWIFT system and the "de minimis" clause (1) of its regulations; any operation that touches U.S. territory, bank, or software is subject to U.S. law. The euro, no matter how much Brussels promotes its "strategic autonomy", has not managed to deploy a parallel payment infrastructure that protects its companies from the extraterritorial jurisdiction of the dollar.

The most serious attempt to break that dependence was the Trade Support Instrument (INSTEX), created in 2019 by France, Germany and the United Kingdom to circumvent sanctions on Iran. The euro-denominated platform barely handled transactions worth a few million euros before being crippled by diplomatic pressure and banks' reluctance to lose their access to New York's financial system. The case showed that the euro can serve as a token trading currency, but not a sanction currency or a resistance currency.

On the level of international reserves, the euro has gained ground slowly but steadily; it went from 18% in 2000 to 21% in 2023, according to the International Monetary Fund. That increase reflects less a vote of confidence in the currency than a defensive diversification by Asian and Latin American central banks that fear being caught in the U.S. firing line. For Beijing, accumulating euros is a way of partially de-dollarizing its 3.2 trillion reserves without having to resort to the yuan, whose convertibility remains limited.

China, in fact, has found in the euro a tactical ally; In 2022, it issued euro sovereign bonds worth €4 billion, the largest placement in that currency since 2004. The operation, aimed at European and Asian investors, sent two signals; that Beijing can finance itself outside the dollar market and that the euro is welcome in "de-dollarization" as long as it does not require full financial openness. Brussels, for its part, has responded cautiously; it celebrates the demand for its currency, but prevents those operations from being done at the expense of its own technological security.

The currency war has a silent front; commodities. Russia, after being expelled from the dollar market, is demanding gas payments in euros from its European customers until 2022 and, after the invasion of Ukraine, is now demanding rubles. The euro thus becomes the transition currency between the dollar order and the emerging multipolar order. However, the European Union has preferred to accelerate the green transition rather than strengthen the international role of the euro; the Fit-for-55 package (2) and the REPowerEU (3) seek to reduce dependence on energy imports, which in the long term will reduce the volume of transactions in euros linked to gas and oil.

The euro's real Achilles' heel remains political; it lacks a single treasury and European debt paper comparable to the US T-bond. The 27-member states retain fiscal sovereignty and, with it, the possibility of issuing national debt that competes with that of their neighbour. Until the Union completes the banking union and develops a pan-European risk-free asset – the European green bond project is a first step – the euro will remain a regional currency without sufficient depth to store the excess global savings that today flows into the dollar.

In the short term, the euro will not challenge the dollar's hegemony or replace the yuan in China's ambitions. Its role in the economic cold war will be, rather, that of a containment platform: cushioning shocks for European economies, offering a lesser way of financing to sanctioned countries and serving as a diplomatic alibi when Brussels tries to mediate between Washington and Beijing. In the medium term, however, each new cycle of sanctions, each cut in the supply chain, and each dollar debt crisis broadens the base of countries interested in an alternative. If Europe succeeds in turning that latent demand into institutions – a deep capital market, an autonomous payments system and a single external voice – the euro could cease to be a trench currency and become, at least, a bargaining chip. Until then, he will watch the war from the neighboring trench, hoping that the war will not also end his own territory.

(1) De minimis clause (in U.S. sanctions)

It is the percentage threshold used by the Treasury Department to determine when a foreign product falls under U.S. jurisdiction. and, therefore, to its sanctions.

(2) Fit-for-55 is the European Union's most ambitious climate legislative package, presented in July 2021 and adopted in 2023, which seeks to reduce net greenhouse gas emissions by at least 55% by 2030.

(3) REPowerEU is the European Commission's emergency plan, presented in May 2022, to become independent from Russian fossil fuels by 2030 while accelerating the continent's green transition.