Last week, Germany’s foreign minister made headlines around the world when he suggested that Europe should be less reliant on the US when it came to the global financial system. In an editorial in this newspaper, he wrote about the need for a more independent SWIFT system as well as a potential European monetary fund, so that the Europeans would not have to be dictated to by the US when it came to issues where they disagree, such as on sanctions against Iran.
The EU wants to uphold a deal made with Iran and continue trading with the country, while the US has already re-established tough sanctions against the Shiite Muslim-majority nation.
More European financial independence may sound like the undercooked analysis of an overly ambitious foreign minister. But this week, it seems to be becoming increasingly popular. On Tuesday, at a meeting of ambassadors in Berlin, Mr. Maas reconfirmed his plans. The German government was prioritizing this, he said, and experts were working to ensure that financial transactions with Iran could go through, while also establishing further systemic independence from the US.
On Monday, French finance minister Bruno Le Maire came out in support of the kinds of ideas Mr. Maas wrote about. “I want Europe to be a sovereign continent, not a vassal, and that means having totally independent financing instruments that do not exist today,” Mr. Le Maire told journalists.
But what might such “instruments” look like? Mr. Maas has written about “an independent SWIFT system.” This system – short for the Society for Worldwide Interbank Financial Telecommunication – began operating in 1977, replacing a primitive telex system for international bank transfers that had, until then, used telegraphed messages, often open to individual interpretation, to send money around the world. Today SWIFT is basically a network with a set of standardized protocols that 11,000 banks in 200 countries have agreed to use to communicate cross-border payments. The SWIFT system transmits more than 5 billion bank-to-bank messages every year. There are other systems that also do this, like the US’ Fedwire and Europe Central Bank’s TARGET2 - but SWIFT is the most widely accepted.
Interestingly, SWIFT is not actually dominated by the US. It is a collective of member banks from all over the world and headquartered near Brussels, in Belgium. SWIFT is supposed to be neutral – and therefore should be able to continue to transfer money to countries like Iran. But over the past decade or so, it has increasingly been seen as a political tool.
There’s no doubt that threatening countries with the loss of access to SWIFT is a powerful disincentive – there are various workarounds to losing touch with what’s been described as “the world’s financial plumbing system” - but they’re expensive and time-consuming.
In the case of the Iran sanctions, SWIFT is also trapped uncomfortably between jurisdictions: The US has made doing business with Iran illegal but the EU has put in place "blocking statutes" that mean local companies don’t need to comply with those sanctions. It’s hard for a global organization to know what to do in this case, even if it says that it obeys Belgian law first and foremost.
Now, there are fears that the US government could pressure SWIFT and even its board: senior executives from 25 of the world's biggest banks, including, from the US, Yawar Shah of Citigroup and Emma Loftus of JP Morgan.
More than one way to solve SWIFT
Nobody knows what US President Donald Trump will do next. However further pressure on SWIFT or its board would represent a significant and unprecedented political escalation, experts say. All of which are pretty good reasons for Mr. Maas to consider developing Europe’s own SWIFT.
If any one country using the SWIFT system interferes, that "hampers the functionality of the system," says Isabel Schnabel, a professor of financial economics at the University of Bonn. If it's not possible to prevent this politically, then another kind of system - even an imperfect one - might be a good idea, Ms. Schnabel argues, simply "because it makes it far less attractive for the US to interfere with SWIFT in the first place."
If the EU had its own SWIFT system, that could “prevent interference with EU payments for Iranian oil exports as well as for generic trade,” notes Jeromin Zettelmeyer, a senior fellow at the Peterson Institute for International Economics in Washington and former director-general for economic policy at Germany’s economics ministry. But there are better ways of solving this problem, he argues, for example by creating special intermediary companies such as an EU-owned oil importer, or an EU-owned trading company. He envisages private companies conducting their Iran business through those intermediaries. “And payments between these EU-owned entities and their Iranian counterparts would be cleared directly, in euros, via the European Central Bank and the Central Bank of Iran,” he explains.
The idea of special “gateway entities” was also reported at Mr. Maas' Tuesday meeting - even though protecting such entities from US sanctions would not be easy and there was no official statement on them.
Axel Hellman, a policy fellow at the European Leadership Network, proposes even less official arrangements for Iran. “When SWIFT disconnected Iranian banks in 2012, some European banks maintained links to Iranian financial institutions through ad hoc messaging systems,” he says. “These practices could be revived.”
It’s a feasible albeit incomplete option, he says, because funds could move between Iran and the Single European Payments Area, or SEPA, before being transferred to other European banks. “The challenge is to make sure that these European banks that deal with Iran - the gateway banks - aren’t cut off,” Mr. Hellman explains.
Mr. Zettelmeyer suggests that private European companies and the special intermediaries could even use SWIFT’s messaging standards – the code that exactly delineates transactions – but not the SWIFT infrastructure. This would be a “more focused alternative that does not create an alternative settlement system. [It would be] only a system for settling specific transactions with Iran, and presumably for a limited period,” he adds.
There are already examples of banks working away from the dollar's dominance. After sanctions were imposed on some large Russian banks after Russia's military interference in Ukraine, those banks were forced out of US dollar transactions but they continued to work successfully on a regional basis. China also established its own system, the Cross-Border Interbank Payment System, or CIPS, in 2015, which is used instead of SWIFT (in some cases) by more than 200 Chinese and international banks, even though it is not as ubiquitous as SWIFT.
Some commentators have suggested that a new EU SWIFT-style system, plus a Chinese one, plus a Russian version, might actually end up doing the opposite of what is intended, strengthening the dollar because of the increased competition and the dollar’s pre-existing dominance.
“There is a trade-off between one large but vulnerable system and several more costly systems,” notes Jochen Andritzky, a visiting fellow at Bruegel, a Brussels think tank, and the former secretary general of the German Council of Economic Experts. “The EU should closely follow developments such as those in China.”
Losing track of terrorist funding
There are further considerations. Last week, German Chancellor Angela Merkel told reporters that the ideas Mr. Maas expressed in his editorial were his own, and not government policy, and that SWIFT was still essential for tracking illicit payments, money laundering and terrorist funding. “On the question of independent payment systems, we have some problems in our dealings with Iran, no question,” she said. “On the other hand, we know that on questions of terrorist financing, for example, SWIFT is very important.”
But here too, EU advocates have an answer. France’s Mr. Le Maire and other analysts working on maintaining the Iran deal have already suggested a European version of the US Treasury’s Office of Foreign Assets Control, known as OFAC. An EU-OFAC would ensure due diligence, common standards, legality and compliance.
Mr. Maas’ suggestion also generated enthusiasm in a completely different sector of the economy - among fans of cryptocurrencies and blockchain technology.
“It would be far more consequential in the long term for Europe to team up with other major powers, such as China and Russia, on global financial reform proposals that include adopting a global blockchain-based financial payment system,” wrote experts from US-based geo-political consultancy Stratfor. “Among the many implications of such a system is the diminished ability of any one player, such as the US, to financially isolate a country through secondary sanctions.”
Whatever happens next, Mr. Maas’ suggestions have certainly started a lively discussion. “As established alliances drift apart and economic warfare is turned into a foreign policy tool, we need to think about regional rather than global approaches,” Mr. Andritzky notes. Even though SWIFT is just one piece of the world’s financial architecture and changing this won’t be enough to disrupt the dollar’s dominance or elevate the euro, “Minister Maas has a point in thinking about defensive safeguards,” he says.
Another commentator has suggested that, rather than fiddling with infrastructure like SWIFT, the EU needs to focus more on improving the euro's stability and independence. A European monetary fund would also help transmit payments to places like Iran. But all that also involves a lot of fundamental questions about the currency union that remain, as yet, unanswered. Tinkering with something like SWIFT may simply be the easiest option right now.
“All of this requires political will in Europe and that is a first key challenge,” Mr. Hellman concludes. “In general, I sense a shift in the mentality: That the defense of the Iran deal has turned into a broader debate on European economic and political sovereignty, its ability to conduct what it considers legitimate and legal business with whom it pleases, and pursue foreign policy based on its own convictions and diplomatic philosophies.”
Cathrin Schaer is an editor with Handelsblatt Global. To contact the author: [email protected]