The Greenback Chokehold

The world cannot accept the US as a global “economic policeman,” declared France’s foreign minister, commenting on the Trump administration’s decision to withdraw from the Iran deal and reimpose harsh US sanctions on any companies that do business with Tehran.

US power may not be what it once was, as Willis wrote last week, but US dominance of the global financial system is one area where Washington still rules the roost. Some two-thirds of international trade and lending is done in dollars, according to the Bank for International Settlements. A similar percentage of governments’ global reserves are held in greenbacks.

Now, if you want to do business in dollars without shuttling them around in briefcases or keeping them stuffed in your mattress, you’ll have to deal at some stage with US correspondent banks. And that’s where Washington can put you over a barrel, by threatening to cut you off from the US financial system if you violate sanctions. That’s precisely what the Iran sanctions do.

European leaders have proposed legislation to deflect the impact of US sanctions, but few CEOs are likely to bet their firms on that. Exclusion from the US financial system would have an immediate and crippling impact, while lawyering it all out could take years. If the US wants to play hardball, then it’s a world of hurt for European companies, which are all deeply entwined with the US financial system.

Over the longer term, of course, alternatives to the dollar-based international financial structure may gain momentum. The Euro accounts for about a fifth of global reserves and lending. But breaking the bond with the US would be extremely costly today.

Beijing, for its part, is keen to boost the renminbi as an international reserve and transactions currency, but only a fraction of non-Chinese trade is RMB-denominated and international RMB reserves remain miniscule. Various governments are also experimenting with sovereign cryptocurrencies as a way to get around US financial system and sanctions, but these bids are in their infancy.

For now, whether the French (or others) can accept it or not, the dollar’s dominance still gives Washington tremendous leverage over friends and foes alike.

More from GZERO Media

Is life better than ever? Measuring human progress today | GZERO World with Ian Bremmer

Was the Beatles' Paul McCartney right - is it getting better all the time? On GZERO World, Ian Bremmer and Harvard psychologist Stephen Pinker talk about human progress and how we define it.

Activists protest at Nigerian Embassy against Ecowas' military intervention in Niger
SIPA USA

After a marked increase in anti-French sentiment following a military coup in Niger on July 26, French President Emmanuel Macron announced that France will immediately withdraw its ambassador and remove its 1,500 soldiers over the next few months.

Police officers patrol in the aftermath of a shooting, at the road to Banjska village, Kosovo September 24, 2023.
REUTERS/Ognen Teofilovski

Is Europe’s tinderbox once again set to explode?

FILE PHOTO: U.S. President Joe Biden poses with Federated States of Micronesia's President David Panuelo, Fiji's Prime Minister Frank Bainimarama, Solomon Islands Prime Minister Manasseh Sogavare and Papua New Guinea's Prime Minister James Marape and other leaders from the U.S.- Pacific Island Country Summit (not pictured), at the White House in Washington, U.S. September 29, 2022.
REUTERS/Jonathan Ernst

Leaders of over 20 Pacific Island nations will arrive in Washington on Monday for a two-day US-Pacific Island Forum Summit, the second such gathering in two years.

President Joe Biden and First Lady Dr. Jill Biden greet President Volodymyr Zelensky of Ukraine at the South Portico of the White House. Zelensky is meeting with Biden following his participation in the United Nations high-level meetings earlier this week.
Allison Bailey/NurPhoto via Reuters

After a week of high-stakes diplomacy, including stops in Washington, the UN General Assembly in New York, Ottawa, and Lublin, Poland, Ukrainian President Volodymyr Zelensky returned home amid fresh conflict in Russia’s war against Ukraine.

The fight to “connect every last person” to the internet | Global Stage | GZERO Media

Doreen Bogdan-Marin spends a lot of time thinking about how to keep the world connected as the Secretary-General of the International Telecommunications Union. The biggest frontier in that realm is expanding internet access to those in the developing world who struggle to get online.

Estonia's digital revolution: a global model of efficiency | Digital Nations | GZERO Media

Carmen Raal, a digital transformation advisor and expert from e-Estonia, shared some remarkable insights into the nation's digital transformation. Estonia, often hailed as a digital pioneer, has undergone a profound digitalization process that sets it apart on the global stage. Carmen explained that 99.99% of Estonia’s public services are accessible online, which includes a strong collaboration between the nations’ public and private sectors.