Economics Essay 96: Joining the Euro

 Evaluate the costs and benefits for a country of joining a currency union, such as the eurozone.

Joining a currency union, such as the Eurozone, can have both costs and benefits for a country. Let's evaluate them:

Benefits of Joining a Currency Union:

1. Elimination of Currency Exchange Costs: By adopting a common currency, countries in a currency union can eliminate transaction costs and exchange rate risks associated with currency conversions within the union. This facilitates cross-border trade, investment, and financial transactions.

2. Enhanced Trade Integration: A single currency can promote trade integration among member countries by removing currency-related barriers. It simplifies pricing, invoicing, and payment processes, leading to increased trade flows and economic integration.

3. Price Transparency and Market Efficiency: A common currency promotes price transparency as consumers can easily compare prices across different member countries. This can enhance market efficiency and competition, benefiting consumers.

4. Increased Foreign Direct Investment: Membership in a currency union can attract more foreign direct investment (FDI) as it provides a stable and predictable economic environment. Investors may find it easier to operate across multiple countries without the complexities of managing currency risks.

Costs and Challenges of Joining a Currency Union:

1. Loss of Monetary Policy Autonomy: Member countries give up their independent monetary policy when joining a currency union. They must adhere to a common monetary policy set by a central authority, which may not be perfectly aligned with their specific economic needs. This can limit their ability to address domestic economic challenges, such as inflation or recession, through monetary policy tools.

2. Limited Fiscal Policy Flexibility: Joining a currency union often entails adherence to fiscal rules and constraints. Member countries must maintain certain fiscal discipline, including limits on budget deficits and public debt levels. This can restrict their ability to use fiscal policy measures, such as deficit spending, during economic downturns.

3. Loss of Exchange Rate Flexibility: Countries in a currency union lose the ability to independently adjust their exchange rates to maintain competitiveness. This can be a disadvantage if a country needs to adjust its exchange rate to respond to external shocks, such as changes in global competitiveness or trade imbalances.

4. Asymmetric Economic Shocks: Economic shocks affect member countries differently due to variations in economic structures, industries, and competitiveness. In a currency union, countries may face challenges in adjusting to these shocks, as they cannot use monetary policy or exchange rate adjustments to mitigate their impact. This can result in uneven economic performance across member countries, leading to disparities in living standards and economic growth rates.

5. Loss of Sovereignty: Joining a currency union involves sharing monetary and economic policy decision-making with other member countries. This can result in a loss of sovereignty and reduced control over crucial economic policy decisions.

In conclusion, joining a currency union, such as the Eurozone, involves trade-offs. While it can provide benefits such as eliminating currency exchange costs, promoting trade integration, and attracting investment, it also comes with costs such as the loss of monetary policy autonomy, limited fiscal flexibility, and challenges in responding to asymmetric economic shocks. Each country needs to carefully evaluate these costs and benefits based on its unique circumstances and priorities before deciding to join a currency union.

Economics Essay 36: Advantage/Disadvantage of joining the Euro

Discuss the possible benefits and drawbacks to EU member countries of adopting the euro.

The adoption of the euro by EU member countries has both benefits and drawbacks. Let's explore them with examples:

Benefits:

1. Price stability: Countries like Germany and the Netherlands, which adopted the euro, have experienced relatively low inflation rates compared to their pre-euro periods. This has provided a stable price environment, benefiting businesses and consumers.

2. Enhanced trade and investment: For countries like Ireland and Spain, joining the eurozone has facilitated increased trade and investment. They have attracted foreign direct investment and witnessed a surge in exports, taking advantage of the seamless trade within the eurozone.

3. Increased credibility and market access: Countries such as Estonia and Slovenia, after joining the eurozone, have witnessed increased investor confidence and improved access to international capital markets. This has allowed them to borrow at lower interest rates and reduce their borrowing costs.

Drawbacks:

1. Limited flexibility during economic crises: Greece faced significant challenges during the global financial crisis, as it couldn't devalue its currency to regain competitiveness. The lack of exchange rate flexibility constrained its ability to address economic imbalances and required external assistance.

2. Asymmetric impacts during economic shocks: The sovereign debt crisis in the eurozone highlighted the challenges faced by countries like Greece, Portugal, and Spain. They experienced severe economic downturns and had limited policy options to address the crisis due to the constraints imposed by the eurozone framework.

3. Loss of seigniorage: For countries like Italy and France, joining the eurozone resulted in the loss of seigniorage revenue. They no longer had the ability to earn profits from issuing their own currency, which could have been used to fund government programs or reduce public debt.

4. Fiscal coordination challenges: The eurozone requires adherence to fiscal rules to maintain stability. Countries like Italy and Spain have faced challenges in meeting deficit and debt targets, requiring them to implement austerity measures and adjust their fiscal policies to comply with eurozone regulations.

5. Differential competitiveness: Countries with structural differences, such as Germany and Greece, face varying levels of competitiveness within the eurozone. The inability to adjust exchange rates can lead to divergent economic performance, with some countries struggling to maintain competitiveness and achieve balanced economic growth.

These examples illustrate the diverse experiences of different countries within the eurozone, reflecting both the benefits and challenges associated with adopting the euro. It is important for each country to carefully consider their specific circumstances and weigh the potential benefits against the drawbacks before making a decision to join the eurozone.

Economics Essay 35: Joining the Euro

 Explain, using a diagram, how an EU member could stabilise its currency against the euro prior to joining the eurozone.

Stabilizing a currency against the euro prior to joining the eurozone involves maintaining a fixed or relatively stable exchange rate between the national currency of an EU member and the euro. Let's define the key terms involved:

1. Eurozone: The eurozone is a monetary union consisting of countries that have adopted the euro as their official currency. These countries share a common monetary policy, overseen by the European Central Bank (ECB), and have given up their national currencies in favor of the euro.

2. Exchange rate: The exchange rate is the value of one currency in terms of another. It represents the rate at which one currency can be exchanged for another. In this context, it refers to the rate at which the national currency of an EU member is converted into euros.

To stabilize its currency against the euro, an EU member can employ several measures:

1. Fixed exchange rate: The country can establish a fixed exchange rate regime, where its national currency is pegged directly to the euro at a specific exchange rate. This requires a commitment to maintain the fixed rate through active intervention in the foreign exchange market by the country's central bank.

2. Currency board arrangement: A currency board arrangement involves issuing a domestic currency that is fully backed by a reserve of euros. The domestic currency is issued at a fixed exchange rate, and the central bank commits to maintaining the fixed rate by holding adequate reserves of euros.

3. Monetary policy coordination: The EU member can align its monetary policy with that of the eurozone to maintain stability. This may involve adopting similar interest rate policies, inflation targets, or exchange rate policies that support the desired stability against the euro.

4. Capital controls: The country may implement capital controls to regulate the flow of capital in and out of the country. These controls can help manage speculative activities and reduce volatility in the exchange rate.

5. Macroeconomic policies: The EU member can pursue sound macroeconomic policies, such as fiscal discipline, maintaining price stability, and implementing structural reforms to improve the competitiveness of its economy. These policies contribute to maintaining confidence in the currency and its stability against the euro.

It is important to note that stabilizing the currency against the euro prior to joining the eurozone is typically a temporary measure. Once a country meets the necessary criteria and decides to adopt the euro as its currency, it will transition to the euro and no longer have an independent national currency.

Examples of countries that have stabilized their currencies against the euro prior to joining the eurozone include Bulgaria, which has employed a currency board arrangement, and Denmark, which maintains a fixed exchange rate within a narrow fluctuation band against the euro.

Overall, stabilizing a currency against the euro prior to joining the eurozone requires careful policy coordination, effective management of exchange rate mechanisms, and adherence to sound macroeconomic principles. It allows the country to establish a foundation of stability and credibility as it prepares for full integration into the eurozone.

Is De-Dollarisation on the Cards? Can the Yuan or a BRICS currency replace the US Dollar?

 

Hope for Britain after Brexit

Those who predict economic Armageddon ignore the reality. The status quo wasn’t working – now there’s an opportunity for change writes Larry Elliott in The Guardian

‘The mass exodus of banks and other financial institutions from the City of London, predicted since June 2016, has not materialised.’ View over the Thames to the City. Photograph: Niklas Halle’n/AFP/Getty Images

So this is it. Forty-eight years after Britain joined what was then the European Economic Community, the fasten seatbelt signs are switched on and the cabin lights have been dimmed. It is time for departure.

Many in the UK, especially on the left, are in despair that this moment has arrived. For them, this can never be the journey to somewhere better: instead it is the equivalent of the last helicopter leaving the roof of the US embassy in Saigon in 1975.

The lefties who voted for Brexit see it differently. For them (us, actually, because I am one of them), the vote to leave was historically progressive. It marked the rejection of a status quo that was only delivering for the better off by those who demanded their voice was heard. Far from being a reactionary spasm, Brexit was democracy in action. 

Now the UK has a choice. It can continue to mourn or it can take advantage of the opportunities that Brexit has provided. For a number of reasons, it makes sense to adopt the latter course.

For a start, it is clear that the UK has deep, structural economic problems despite – and in some cases because of – almost half a century of EU membership. Since 1973, the manufacturing base has shrivelled, the trade balance has been in permanent deficit, and the north-south divide has widened. Free movement of labour has helped entrench Britain’s reputation as a low-investment, low-productivity economy. Brexit means that those farmers who want their fruit harvested will now have to do things that the left ought to want: pay higher wages or invest in new machinery.

The part of the economy that has done best out of EU membership has been the bit that needed least help: the City of London. Each country in the EU has tended to specialise: the Germans do the high-quality manufactured goods; France does the food and drink; the UK does the money. Yet the mass exodus of banks and other financial institutions that has been predicted since June 2016 has not materialised, because London is a global as well as a European financial centre. The City will continue to thrive.

If there are problems with the UK economy, it is equally obvious there are big problems with the EU as well: slow growth, high levels of unemployment, a rapidly ageing population. The single currency – which Britain fortunately never joined – has failed to deliver the promised benefits. Instead of convergence between member states there has been divergence; instead of closing the gap in living standards with the US, the eurozone nations have fallen further behind.

In their heads, those predicting Armageddon for the UK imagine the EU to still be Germany’s miracle economy – the Wirtschaftswunder – of the 1960s. The reality is somewhat different. It is Italy, where living standards are no higher than they were when the single currency was introduced two decades ago. It is Greece, forced to accept ideologically motivated austerity in return for financial support. The four freedoms of the single market – no barriers to the movement of goods, services, people and capital – are actually the four pillars of neoliberalism.

The Covid-19 crisis has demonstrated the importance of nation states and the limitations of the EU. Britain’s economic response to the pandemic was speedy and coordinated: the Bank of England cut interest rates and boosted the money supply while the Treasury pumped billions into the NHS and the furlough scheme. It has taken months and months of wrangling for the eurozone to come up with the same sort of joined-up approach.

Earlier in the year, there was criticism of the government when it decided to opt out of the EU vaccine procurement programme, but this now looks to have been a smart move. Brussels has been slow to place orders for drugs that are effective, in part because it has bowed to internal political pressure to spread the budget around member states – and its regulator has been slower to give approval for treatments. Big does not always mean better.

Leaving the EU means UK governments no longer have anywhere to hide. They have economic levers they can pull – procurement, tax, ownership, regulation, investment in infrastructure, subsidies for new industries, trade policy – and they will come under pressure to use them.

Many on the remainer left accept the EU has its faults, but they fear that Brexit will be the start of something worse: slash and burn deregulation that will make Britain a nastier place to live.

This, though, assumes that Britain will have rightwing governments in perpetuity. It used to be the left who welcomed change and the right that wanted things to remain the same. The inability to envisage what a progressive government could do with Brexit represents a political role reversal and a colossal loss of nerve.

The £ Sterling’s faded illusion of sovereignty

Philip Stephens in The FT

Margaret Thatcher once told me that she would never allow “the Belgians” to decide the value of the British pound. At the time, the then prime minister was battling her chancellor Nigel Lawson’s plan to fix the value of sterling in the European exchange rate mechanism. For some reason she had identified me as one of the chancellor’s confidants. “The Belgians”, equally inexplicably, was her shorthand for the EU.  

The fight cost the chancellor his job, but a year or so later Thatcher was obliged to relent. Two years after it joined the ERM, sterling crashed out of the system amid a tsunami of speculative selling. 

Thatcher by then had gone, replaced by John Major. Even so, the pound became an inviolable emblem of national sovereignty in the Conservative party’s long war with Brussels. Before too long, another Tory leader, William Hague, was promising to “save” sterling from the euro. Black Wednesday, you could say, mapped the Tory route to the Brexit vote in 2016.

I was reminded of the Thatcher encounter by a report published the other day by analysts at Bank of America. Since the Brexit referendum, the pound has rather lost its lustre as a store of value. It no longer bears comparison, the analysts said, with traditional peers such as the dollar, yen, swiss franc or euro. Instead, sterling may more closely resemble an emerging market currency, such as the Mexican peso. Sterling’s effective exchange rate has fallen by about 14 per cent since 2016, but twin budget and current account deficits promise further trouble.  

In truth, Thatcher’s elevation of the pound into an essential pillar of nationhood belied its postwar role in Britain’s fortunes. For decades, an ever-present threat of devaluation was a ball-and-chain around the ankles of successive prime ministers. In 1945, about half the world’s trade was still transacted in sterling. From then on, it was all downhill.  

The failed effort to defend Britain’s global prestige through preservation of the so-called sterling balances held by overseas central banks and financial institutions left governments at the mercy of international investors and speculators. 

It also produced a series of politically costly devaluations. In 1950, one pound bought about 12 Deutsche Marks. In the absence of the euro, the comparable figure today would be a little above two. 

In effect, pressure on the pound measured the gap between Britain’s determination to hold on to its status as a world power, and the capacity of a stuttering domestic economy to generate sufficient resources to match its overseas ambitions and commitments. The price of propping up the pound was a ruinous stop-go approach to domestic economic management. 

It was no coincidence that the devaluation that was forced on Harold Wilson’s government in 1967 sounded the final retreat from imperial pretensions with the subsequent withdrawal of British forces from east of Suez. 

In the circumstances, one might think that sterling would have lost its talismanic status long ago. The sovereignty so preciously guarded by the Brexiters is an illusion. The truth Thatcher could never admit was that the appearance of national control does not change the facts of foreign exchange markets. The pound’s exchange rate, fixed or otherwise, ultimately depends on the confidence, or otherwise, of foreign investors in the nation’s political stability and economic performance — and, yes, that includes the Belgians. 

Mark Carney, the former governor of the Bank of England, has also remarked on how sterling has “decoupled” from its usual peers. Bank of America’s grim prognosis, however, is not universally shared among financial institutions. 

Some think the pound’s present exchange rate anticipates more economic disruption after the expiry of the Brexit transitional arrangements. In the short term, the conclusion of even a fairly thin trade deal with the EU27 could see a temporary appreciation. 

That said, trade deal or no deal, and even assuming a relatively robust recovery from the coronavirus-induced recession, Brexit will throw up new barriers to trade with Britain’s most important market. This promises in turn lower-than-otherwise economic growth, and a widening of the current account deficit. It is hard to find reasons for a positive view of the pound over the medium to long-term. 

The government, of course, could treat sterling’s move to the sidelines as something of a liberation. For now, it has little problem financing its burgeoning government deficit. Devaluation would also provide at least a temporary route to improved competitiveness. It could even pretend, as Wilson did, that a weak currency does not cut living standards. 

I am not sure this would sit alongside Boris Johnson’s expansive pledge to turn Brexit into the platform for the relaunch of “Global Britain”. The prime minister, I am told, is emotionally sympathetic to grand talk about carving out a new role in the Gulf and beyond. 

But no one knows where the money would come from. 

One way or another, sterling holds up a mirror to the world’s view of Britain. The signals are not encouraging. In the 1970s, the UK earned the sobriquet of “the sick man of Europe”. The danger now is it will become the invalid on Europe’s edge.

German court decides to take back control with ECB ruling

Martin Wolf in The Financial Times 

The 75th anniversary of the defeat of Nazi Germany was May 8. The 70th anniversary of the Schuman declaration, which launched postwar European integration, was May 9. Just days before both, the German constitutional court launched a legal missile into the heart of the EU. Its judgment is extraordinary. It is an attack on basic economics, the central bank’s integrity, its independence and the legal order of the EU. 

The court ruled against the ECB’s public sector purchase programme, launched in 2015. It did not argue that the ECB had improperly engaged in monetary financing, but rather that it had failed to apply a “proportionality” analysis, when assessing the impact of its policies, on a litany of conservative concerns: “public debt, personal savings, pension and retirement schemes, real estate prices and the keeping afloat of economically unviable companies”. 

Monetary policies are necessarily economic policies. But the ECB’s policies, including asset purchases, are justified by the fact that it was — and is — failing to achieve its treaty-mandated “primary objective”, which is “price stability” defined as inflation “below, but close to, 2 per cent over the medium-term”. The EU treaty says other considerations are secondary. 

The court also decreed that “German constitutional organs and administrative bodies”, including the Bundesbank, may not participate in ultra vires acts (those outside one’s legal authority). Thus, the Bundesbank may not continue to participate in the ECB’s asset purchase programmes, until the ECB has conducted a “proportionality assessment” satisfactory to the court. 

Yet the EU treaty states that “neither the ECB, nor a national central bank . . . shall seek or take instructions . . . from any government of a member state or from any other body [my emphases].” The court’s instruction puts the Bundesbank into a conflict of laws. 

The court is also assailing the right of the ECB to make its policy decisions independently. Germany fought hard to install central bank independence within the monetary union. Now, its constitutional court has decreed that unless the ECB satisfies the justices that it has taken full account of a highly political list of side-effects of monetary policies, asset purchases are impermissible. Courts in other member countries may see fit to decree that their national central banks cannot participate in policies they dislike. Pretty soon, the ECB will have been sliced and diced into a nullity. 

Above all, the German court decreed that it can ignore an earlier ruling of the European Court of Justice in favour of the ECB, because the former “exceeds its judicial mandate . . . where an interpretation of the Treaties is not comprehensible and must thus be considered arbitrary from an objective perspective.” This is an act of judicial secession. 

The EU is an integrated legal system, or it is nothing. It rests on the acceptance by all member states of its authority in areas of its competence. In a press release after the constitutional court’s judgment, the ECJ rightly responded that “the Court of Justice alone . . . has jurisdiction to rule that an act of an EU institution is contrary to EU law. Divergences between courts of the member states as to the validity of such acts would indeed be liable to place in jeopardy the unity of the EU legal order and to detract from legal certainty.” Imagine if the courts of every member state were able to decide that ECJ rulings were “arbitrary from an objective perspective”. 

What are the implications? 

If the German court is ultimately satisfied that the ECB adequately assessed the economic impact of its purchases, the PSPP might continue. But the courthas reduced the ECB’s future flexibility by limiting its holdings of any member country’s debt to 33 per cent of the outstanding total and insisting that asset purchases be allocated according to member states’ shares in the ECB. 

In the absence of other eurozone support programmes, the chance of defaults has jumped. Indeed, spreads on Italian government bonds have duly risen a little since the court’s announcement. A crisis might ultimately ensue, with devastating effects; perhaps even a break-up of the eurozone. 

Others might follow Germany in rejecting the jurisdiction of the ECJ and EU. Hungary and Poland are obvious candidates. Future historians may mark this as the decisive turning point in Europe’s history, towards disintegration. 

What can be done? The ECB cannot be accountable to a national court. But the Bundesbank could provide the court with the proportionality analysis. Maybe that would be enough, albeit also a bad precedent. Or, the decision could be ignored. If a German court can ignore the ECJ, maybe the Bundesbank can ignore that court. Alternatively, the ECB could just abandon efforts to rescue the eurozone and accept whatever outcome emerges. 

The EU could initiate an infringement proceeding against Germany. But its direct target would be the German government, which is caught between the EU organs on the one hand and the court on the other. It could not change the ruling. 

More radically, the EU could act to create the needed degree of fiscal solidarity. But the obstacles to this are large. A new treaty looks out of the question in today’s environment of intense mutual distrust. Finally, Germany could boldly secede from the eurozone. Yet, before it makes such a decision, one hopes it, too, will be required to do a full analysis of whether that would be “proportionate”.

One point is clear: The constitutional court has decreed that Germany, too, can take back control. As a result it has created a possibly insoluble crisis.

Currency warrior: why Trump is weaponising the dollar

Businesses in countries such as Russia are testing the power of the reserve currency but it could benefit from any global instability writes Sam Fleming in The FT


In an industry long dominated by the dollar, it was a move that carried obvious symbolic weight. 

Last summer Russian diamond miner Alrosa tested a new system for selling its rocks in roubles to clients in countries such as China and India, as an alternative to the US currency. 

Since then the company has conducted about 50 transactions under the mechanism, using a range of currencies, says Evgeny Agureev, Alrosa’s director of sales, who says avoiding dollar conversion allows transactions to be conducted more speedily. 

“The number and volume of these transactions is relatively small . . . but we think it is valuable for our clients to have a variety of options for settlement to choose from,” he says in an email, adding that the “world changes and we need to respond”. 

Though under consideration for several years, the initiative by the partly state-owned miner is a sign of a growing appetite to find ways of shaking off the stranglehold the US dollar has long held on global commerce and finance. Those efforts have taken on high urgency given Donald Trump’s increasingly aggressive use of US economic and financial weaponry to get his way in foreign affairs. 

The president has thus far engaged in minimal military conflict, but he has proved an unusually pugnacious currency warrior, as he pairs a tendency to talk down the dollar’s value in his quest for a smaller trade deficit with an unusual willingness to use the currency’s global heft as a tool of foreign policy. 

Critically, sanctions, which can block foreign officials or corporations from accessing vast swaths of dollar-dominated commerce and finance, are being deployed against Russia, Iran, North Korea, Venezuela and a host of other countries, alongside tariffs and other restrictions on key companies such as telecoms manufacturer Huawei. As a result, economies including China and Russia are examining mechanisms to curtail their reliance on the dollar, while European capitals are seeking ways of circumventing America’s new barriers on dealings with Iran. 

To date the initiatives amount to less than a pinprick in the US currency’s hegemonic status, as underscored by the modest scale of Alrosa’s foreign exchange innovation. But Mr Trump’s unilateralist approach has unquestionably unleashed a phase of experimentation elsewhere, prompting some analysts to ask whether, in the longer term, the US dollar’s supreme position in the global financial system could be shaken as other nations revolt against what they see as Mr Trump’s arbitrary use of American power. 

Adam M Smith, a former Treasury and White House official who is now a partner at law firm Gibson, Dunn & Crutcher, says the manner in which Mr Trump is wielding America’s economic power is unprecedented, as he uses sanctions, tariffs, trade negotiations and export controls interchangeably. 

“He is using the importance and attractiveness of the US market to the rest of the world as a coercive tool to get others to bend to his will,” says Mr Smith. “Does the very aggressive use of these economic tools make it more urgent for countries to find ways to avoid the US market? Probably. However, the urgency may not mean that most countries will be successful in finding effective workarounds.” 

America has long enjoyed a singular economic arsenal thanks to the ubiquity of the dollar and the centrality of its economy and financial system to global commerce. Although America’s share of global gross domestic product may have declined, its currency still accounts for over 60 per cent of international debt, according to a speech by European Central Bank official Benoît Cœuré in February, and leads the euro both as a global payment currency and in foreign exchange turnover. It dominates pricing of commodities such as oil and metals and accounts for about 40 per cent of cross-border financial transactions. 

The dollar’s share of global foreign exchange reserves has slipped in the 10 years since the financial crisis, but at 62 per cent of the total it still dwarfs all rivals. The euro has lost greater ground over the same time, now standing at just over 20 per cent. The Chinese renminbi is just a few per cent of global reserves, and a mere 2 per cent of international payments, according to the global transfer network, Swift. 

This unique place at the heart of the global economic system gives the US government enormous power. Using the dollar almost invariably means touching a US financial institution, says Eswar Prasad, a professor of economics at Cornell University. This immediately puts you within the reach of US government and regulators. 

The US toolkit is particularly potent thanks to the use of “secondary” sanctions. Normal US sanctions aim to prevent American citizens from dealing with a given country or party, but secondary measures allow the government to penalise third parties that do business with a sanctioned country. 

The consequences for non-US institutions of failing to comply with US rules can be severe. In 2014, for example, BNP Paribas was hit by a penalty of nearly $9bn by the US authorities in connection with sanctions violations, as well as being forced to temporarily suspend part of its US dollar clearing work. 

While Washington’s use of sanctions has been on the rise for decades, Mr Trump has emerged as a particular enthusiast. Data compiled by Gibson Dunn show 1,474 entities were subject to sanctions designations in 2018 — 50 per cent higher than in any previous year for which it has kept records. 

The power of these tools has been felt across markets. The Treasury’s decision to sanction metal groups Rusal and parent company En+ led to a surge in aluminium prices, before it agreed to ease its stance if its major shareholder, Oleg Deripaska, gave up control. Sanctions were lifted in January. 

Last August Turkey was plunged into a currency crisis as the US imposed swingeing tariffs on its steel and aluminium exports, on top of sanctions on senior ministers. 

The US Congress has equally been aggressive in pushing sanctions. In April a cross-party group of senators led by Republican Marco Rubio and Democrat Bob Menendez demanded sanctions against senior Chinese Communist party officials in response to alleged human rights abuses against Uighurs and other Muslim minorities in the northwestern province of Xinjiang. 

This month senators demanded the more rigorous enforcement of US regulations against Chinese companies that seek access to US markets. Hawks such as Mr Rubio want to take matters further and more closely examine China’s ready access to US finance. 

“China poses the greatest long-term threat to US national and economic security. At a minimum, American investors should be aware of where their money is going when it comes to Chinese investments,” said Mr Rubio. 

The Trump administration’s aggressive use of sanctions carries multiple risks. It is not only rivals who are upset: the US has at times also incensed close allies, which for decades have viewed Washington as a reliable steward of orderly global markets. 

In the longer term it could accelerate a trend in which other countries wish to reduce their reliance on the dollar for its main three purposes — as a store of value, a unit of account and a medium of global exchange. In the very long run, some specialists fear the US dollar’s totemic status at the centre of the global economy could be eroded, or even supplanted, just as the British pound was by the dollar during the interwar period. 

Richard Nephew, a former US government sanctions specialist who is now programme director at Columbia University’s Center on Global Energy Policy, says that for at least the next five to 10 years the world is locked into the dollar as the default currency. 

But he argues there will be an evolution towards a system where the US is not the sole significant trading currency. US policy today “will increase the speed with which that transition takes place”. 

A recent report from the Center for a New American Security think-tank argues that a host of factors could conspire to weaken the impact of America’s economic policy arsenal over the longer term. Critically, it says that if the US attempts to reduce its economic, financial and trading connections with key overseas economies, “over time US coercive economic leverage over those economies will diminish”. 

Russia has been at the forefront of attempts to de-dollarise, spurred on by the punishing impact of US sanctions on its economy. “We are not ditching the dollar, the dollar is ditching us,” Russia’s president Vladimir Putin said late last year. “The instability of dollar payments is creating a desire for many global economies to find alternative reserve currencies and create settlement systems independent of the dollar.” 

Russia’s central bank last spring sold $101bn worth of dollars from its reserves, shifting the holdings into renminbi, euros and yen, according to official data published in January with a six-month delay. Fifteen per cent of Russia’s reserves were in the Chinese currency last summer, the data showed, three times the proportion at the end of the first quarter of 2018. 

For its part, China has experimented with denominating oil futures in its currency as well as working on its own international payments system. 

In June Russia agreed with China at a summit between Xi Jinping and Mr Putin to do more trade in their respective currencies. The rouble and renminbi’s share of Chinese imports into Russia edged up from 17 per cent in 2017 to 24 per cent in 2018, according to economist Dmitry Dolgin of ING. 

Yet for all the political attention, the two countries’ attempts to reduce the dollar’s role remain in their infancy. For example, China and Russia set up a non-dollar direct settlement plan to help with their gas pipeline deals around 2015. However, in practice, the Chinese side uses it as little as possible, in part because of the risk of rouble volatility. 

China has also harboured aspirations to turn its Belt and Road Initiative into a platform for boosting the international use of the renminbi. But it would in practice have to dramatically liberalise its capital controls to gain widespread acceptance as a reserve currency. 

In Europe, frustrations have been growing at the continent’s faltering attempts to boost the euro’s global role alongside the dollar. Top French officials including François Villeroy de Galhau, governor of the Banque de France, have called for greater use of the euro in international transactions in a bid to challenge the dollar’s dominance. European Commission president Jean-Claude Juncker last year said it was an “aberration” that the EU paid for more than 80 per cent of its energy imports in dollars despite only 2 per cent of imports coming from the US. 

Yet the pattern since the financial crisis has if anything been a decline in the euro’s international role. Gita Gopinath, the IMF’s chief economist, points to a reduction in euro invoicing and international financial transactions. “The dollar on the other hand has gained relative to the euro in the last 10 years,” she says. 

Meanwhile progress on a high-profile mechanism backed by major European countries that aims to sustain trade with Iran despite newly imposed US sanctions has been painfully slow.   

Sigal Mandelker, the Treasury official in charge of enforcing sanctions, points out that despite European efforts to keep their businesses invested in Iran following Mr Trump’s withdrawal from the nuclear deal, the companies “got out in droves”. 

“There are people out there who argue we have overused the tool,” says Ms Mandelker, “[but] if you look at our objectives and how we are using the tool, you will see that what we have been doing systemically is to change behaviour, to disrupt the flow of bad money, and to go after entities and individuals who pose national security and illicit finance risk.” 

For all the warnings that the US will undermine its own currency by being so aggressive, there is little sign of any diminished appetite for using the greenback. Kevin Hassett, the outgoing chairman of Mr Trump’s Council of Economic Advisers, says: “If you thought that the Trump policies were imperilling the status of the dollar, then your case would be stronger if you showed that the dollar had collapsed a lot under Trump policies . . . But the move in the dollar has been kind of the opposite of that.” 

Ms Gopinath is sceptical about the chances of near-term change. “You are hearing more noise right now for other currencies to become truly global currencies. But the data do not show a more forceful dynamic in this direction and it would take a lot more than what we’re seeing now for there to be a switch.” 

Indeed, the irony is that if the president ends up triggering global instability via his policies, investors may end up flocking all the more enthusiastically towards dollar assets. That was after all the phenomenon during the financial crisis, when a mortgage meltdown that was made in the US prompted global investors to scamper for the safety of government bonds, and it has been the same story more recently as Mr Trump’s trade wars drove down US bond yields. 

“Anything Trump creates to foment uncertainty and instability will only end up strengthening the dollar,” says Mr Prasad. Over time, other countries will indeed get tired of this and shift away from the dollar as a unit of account and a medium of exchange, he adds, but “in the foreseeable and longer future the dollar’s role as the dominant store of value is unlikely to be challenged.”

Modern Monetary Theory - Stephanie Kelton

Why Germany Cannot and Should Not Pay to Save the Eurozone

Yanis Varoufakis at the Leibnitz Institute