How the US treats its allies: the European banking system under threat

Commentary

The BNP Paribas case shows that the United States is happy to risk plunging the European banking system into chaos. Europe should take note.

A New York-based court is about to fine France’s (and Europe’s) leading bank, BNP Paribas, for a sum reported to be between $2 billion and $16 billion. The move strikes hard at the deeply sensitive connection between geo-economics and global finance, on the one hand, and the United States’ leverage over the global system, on the other.  

Let’s assume that the leaks and rumours about the case are all true: that BNP Paribas is guilty of dealing with countries under US embargo (Iran, Sudan, and Cuba have all been mentioned) and of using remittances in US dollars in the process, making this a violation of US law. Let’s admit the irony that the highest name singled out by these rumours at the bank symbolises an age-old French establishment, spanning aristocracy, old wealth, a former presidential family, diplomacy, and now rogue banking.

Even accepting all that, France is not the only country in which banks take liberties with rules. The Anglo-Saxon world excels at the management of offshore capital markets with provisions that are designed to favour its own business – for example, Delaware and the Virgin Islands. BNP Paribas has undermined sanctions mechanisms that are vital to global governance. But three issues should be considered before rushing to hand out crushing penalties: the coincidental factor that has created a technical violation of US law; the proportionality of the punishment; and the systemic impact of the case.

The only reason that BNP Paribas is liable to prosecution is that it conducted its energy trading in US dollars – using the dollar as the global currency that it is, especially in the oil trade. If BNP Paribas had traded in euro – or perhaps in renminbi – it would not have been liable to prosecution. This has serious implications for global governance. The US derives an “exorbitant privilege” from issuing the world’s only truly global currency. It has never used this privilege against China, which is the biggest international holder of dollar reserves, of which two-thirds flow through offshore capital markets. But the US is using its privilege against Europeans. How likely is it that Chinese banks and companies have never traded with a country under sanctions – such as North Korea, Burma, Iran, Sudan, or Zimbabwe – and used US dollars in the process?

The European Union and the euro zone are, of course, trapped in contradictions of their own. They talk about and in effect decide on sanctions that are at variance with US sanctions, yet they have not implemented the full monetary sovereignty that would make these choices truly independent. China’s choice not to internationalise the yuan but instead to create its own web of swap and renminbi trading remittances now looks sensible indeed. One illustration is the very recent decision by Russia to use renminbi in its trade with China – which will in the future make it impervious to sanction mechanisms (in the old days of the Sino-Soviet Alliance, the two socialist countries traded in Swiss francs!).

Moreover, the proportionality of BNP Paribas’s punishment seems doubtful. A $10 billion fine would wipe out a year of the bank’s profit. Furthermore, the fine would be extracted in cash from the bank’s shareholders’ funds rather than from deposits. This would lead to a major systemic risk: the leading European bank emerging from a major banking crisis across the West would most likely be forced to recapitalise, and in doing so, to sell off a great part of its business.

At this point, geo-economics begins to intersect with geopolitics. The American financial system brought Western finance to its knees with its untamed excesses before 2007, which was the main cause of the euro crisis that followed. Further, the US, as it is accustomed to doing, is using its privilege to find a solution that benefits itself at the expense of almost all others. It should not be allowed to wreak havoc in the European economy a second time. A shameful comparison can already be made between the US Federal Reserve’s infinite money creation policy and the all-too-prudent management of the same issue by the European Central Bank. Like Japan before it resorted to self-centred Abenomics, Europe is paying the price, with an overly high euro, for being a responsible central banker. Should Europe also stand by while an overbearing “ally” grants itself the right to create a bankruptcy risk for the European banking system?

The US’s loyal – some would say naïve – allies need to learn a lesson about the Obama administration’s behaviour. This US administration is more attentive to foes and to coalition partners than it is to its allies, whom it takes for granted, when it does not hold them in contempt. France under its last two presidents has been America’s staunchest ally on a whole range of fronts. It has been the main European provider of global security outside Europe, from Africa to Afghanistan. For its pains, it has suffered a humiliating and last-minute let-down over Syria, without so much as a word of explanation. No other country is closer to US views on Iran or Russia than France, even if French policymakers are fully aware of the untalented, sometimes hectoring and sometimes compromising diplomacy in which the US now specialises. For example, US sources heaped abuse on France when it slowed down the Geneva negotiations with Iran, even though France in fact succeeded in getting better terms than those for which the US had compromised.

But France’s own domestic economy is weak right now – perhaps as weak as it has been at any point since the early 1950s. Its financial firms have few friends in the Anglo-Saxon world, which feels threatened by France’s potential to emerge as a core for a euro zone banking system, something that France encourages. This is the context in which a New York-based judicial system has been given a free hand to ravage the French banking system.

Strong towards the weak, weak towards the strong: that is how President Obama’s global strategy now looks. Most people now doubt America’s alliance commitments, from the East China Sea to Ukraine. The US has proven incapable of checking China’s geopolitical advances because of its extensive business interests in the region. It can threaten broad sanctions against Russia only because it has no economic interests there: instead, its allies will pay, as they have already done for aiding Eastern Europe and as they will again for the stabilisation of Ukraine. The US, much more so than Europe, is an obstacle to the reform of the International Monetary Fund, to efforts to curb offshore banking, to checking climate change. But it can leverage its enduring monetary hegemony to threaten havoc on the financial system of an ally at the worst possible juncture.

We very much hope that, if found guilty, some of the executives at BNP Paribas who are responsible for this mess are sentenced. Of course, even if they are jailed, they would be unlikely to meet up in prison with US executives punished for their role in fostering the 2007-2008 crisis, since no one has actually gone to jail for that disaster. But if a gigantic fine is extracted from the French and European banking system, the first political result will be to weaken the alliance with the US in the eyes of those who saw it as politically desirable.

Perhaps President Obama and his isolationist administration, now reshaping foreign policy according to the short-term economic interests of global predator firms and of US hegemony over finance and energy markets, have no use for allies at this point in history. President Obama is prioritising US economic security over all other concerns and in the process disregarding the economic security of US allies. Europe should sit up and take notice. 

The European Council on Foreign Relations does not take collective positions. This commentary, like all publications of the European Council on Foreign Relations, represents only the views of its authors.

Read more on: Asia, European Power, European Strategy, Transatlantic relationship

Latest from ECFR

ECFR Podcasts

Our experts and eminent guests talk about Europe's role in the world. Subscribe on iTunes or Soundcloud.