Compromising on the ruble is only the first step
Just after the election, France has expressed its support for the purchase of Russian gas in rubles; before that, the UK and the EU have both expressed their support for the settlement of Russian gas in rubles; earlier, U.S. Treasury Secretary Yellen also expressed her understanding of the serious dependence of the European economy on Russian gas; a few days ago, although its dependence on Russian gas reached 90%, Bulgaria still chose to reject the ruble settlement, and its supply was then cut off by Russia. So far, the "Ruble Settlement Order" has come into effect, and everything seems to be unusually "smooth" …
In the Russian-European trade, the EUR was forced to compromise with the "Ruble Settlement Order", and the "gas EUR" came to an end. This marks a qualitative change in the monetary basis of the Russian-European trade system; it also means that, once the "Ruble Settlement Order" expands its scope of application, not only the EUR may be fully reduced to a weak currency in the European-Russian trade; more foreshadowing, the ruble's status and function in the international trade system will be fully enhanced; in terms of its development, the EUR's compromise and concessions are also bound to motivate Saudi Arabia and other oil-producing countries to choose currencies other than the USD and the EUR to settle their oil trade, compared to the USD, the EUR's external space will be under greater pressure, and greater setbacks may follow.
The EUR's entry into the USD system and the imposition of economic sanctions on Russia not only met with a bad time for a sharp rise in inflation, exposing the fatal energy shortage in its own economic system, but also caused an unprecedented impact and weakening on the EUR's position as a currency for international trade settlement. The compromise and concession to the ruble may indicate that the EUR's global monetary position is collapsing, which is the first step in the transformation of the EUR.
After the unification of European currencies, the newborn EUR once challenged the global monetary hegemony of the USD, but soon lost its position and became the second-largest reserve currency in the world, or even the "spare tire of the USD". In 2003, the total economic output of the EU exceeded that of the U.S. for the first time, becoming the largest economy in the world. In 2008, the total economic volume of the EU reached an all-time high, and then fell all the way down. Two years later, the total economic volume of the EU was surpassed by the U.S. and receded to the second largest in the world. On January 31 this year, the EU announced that its 27-nation GDP in 2021 was 14.09 trillion EUR or about 15.73 trillion USD, and the total economic volume of the EU was surpassed by China for the first time, falling to the third-largest economy in the world. In terms of trade, European and American trade continues to be the largest bilateral trade in the world, with China replacing the U.S. as Europe's top trading partner in 2020; also, ASEAN replaced the EU as China's top trading partner in 2020. In 2021, the EU returns to its position as China's top trading partner, but given the newly fully-effective RECP, China and ASEAN will still have the largest bilateral trade in the world. In this regard, it is probable that the EU will lag behind ASEAN in the long term. Eurozone economic growth and trade expansion has shown weakness, which determines the fact that the global expansion of the EUR has become weak already.
Looking back, it is because of the dominant power of the USD, that the U.S. authorities always impose sanctions with the USD, so that the economies concerned get fearful and seek the EUR as a shelter, for which EUR is the spare tire of the USD. In other words, as an alternative to the USD, the EUR is not entirely dependent on the strength of the Eurosystem, but is actually a product of international politics. The Eurosystem, of course, knows what it wants, and is deliberately distancing itself politically from the USD, absorbing the actual benefits of the global trend of "de-dollarization".
However, although it is a "spare tire" for the USD, the EUR is already "under-inflated", even so, the EUR is still forced to get involved in the USD's battle to join the economic sanctions against Russia. Thus, the EUR not only failed to act as a shield for Russia's "de-dollarization", but also backfired on the Russian monetary and economic system. Therefore, the Kremlin will not be able to continue the status of the EUR as the gas trade settlement currency. The "Ruble Settlement Order" makes the ruble reveal sharp and robust canine teeth, piercing the EUR as a spare tire of the USD.
Responding to "resource nationalism"
At present, the world is facing the double impact of heavy inflation and stagnation, and the pressure on the global monetary system has been quite considerable. The deep-seated contradictions and sharp real-life conflicts inherent in the international economic system will inevitably come to the fore on a large scale, and different segments will collide more violently or even reject and alienate each other. The complex factors of counter-globalization and de-dollarization will be mixed with geopolitics and nationalism or populism, and new situations and problems will emerge.
Under the Russia-Ukraine conflict, Ukraine's crude steel, Russia's neon gas, metal palladium, nickel, titanium, as well as potash, nitrogen fertilizer, etc., are strongly agitating the situation of the global related industries, and if they still consider that the international market forces can completely influence them, overseas capital forces can completely domesticate them, and the EUR and USD are sufficient to attract them, they are seriously out of reality and sufficiently dangerous. The "Ruble Settlement Order" is a reactionary strategy in the economic sanctions war, but it also has deep roots in the economy. Earlier, the EU had to agree with Russia and establish a trading system with the EUR as the settlement currency, so as to permanently stabilize the monetary and resource base of the European economic system. The EUR is not a favored one, and its foundation is not firm enough. The commercial agreement on the settlement currency clause in the trade contract with Russia has not been raised to the government level, and it is unable to resist geopolitical conflicts and war risks. This monetary structure based on shallow commercial relations is totally inadequate to counter the impact of the international situation reversal, especially the EU's initiative to launch economic sanctions against Russia, which in fact creates technical difficulties for both parties to perform the contract and reduces Russia's capacity and willingness to perform the contract.
Globally, the Indonesian rupiah, the Brazilian real, the Australian dollar, the Indian rupee, and the Russian ruble have not depreciated as usual during the current round of USD rate hikes and appreciation, indicating that the local currencies of the major economic resource countries are being sought after by the international market or international capital. The deeper reason is that the major resource countries are consciously or unconsciously pursuing the strategy of resource nationalism, that is, trying to increase the added value of their economic resources in the international economic system, rather than simply selling them in trade. The fragility of the supply chain brought about by the COVID-19 pandemic has raised the tensions of resource nationalism. A "rebellion" is taking place between the international monetary system and the low value-added resource system on which the high value-added industrial system sought after by international capital markets depends, with the latter demanding to defend its interests and resist the "exploitation" of the current global market system and even the monetary system.
Is the international monetary system, and to what extent exactly, yielding to resource nationalism? This is still an open question. However, with both Tchaikovsky and the Russian Blue Cat excluded by the West, the resource nationalism tensions will only intensify. The compromise of the EUR, the GBP, etc. on the ruble shows that it is very dangerous and harmful to completely ignore and reject the "resource nationalism" trend or to continue to undermine the interests of the parties involved. That is to say, even if the war between Russia and Ukraine subsides, the already revealed sharp teeth of the ruble will not become blunt, much less rot on its own...
EUR requires a restructuring of its monetary base
Since the outbreak of the full-scale conflict between Russia and Ukraine, the war has continued to heat up, and the impact on the EU economy and the damage caused is getting increasingly large, with prices of energy, food, and raw materials soaring, and the danger of the supply chain cracking or even fracturing intensifying; at the same time, the global economic situation has continued to deteriorate due to the impact of the pandemic, war, inflation, etc., and is facing major inflation, stagnation, and the similar trend as the Great Recession. Under such a critical economic situation, the EU has not formed a concerted will to fight for the economy, but has been deeply influenced by the geopolitical conflict due to the Russia-Ukraine conflict. The EU has been fighting for politics with all its strength, making itself caught and struggled in the consumption of economic sanctions & countersanctions with Russia for a long time. So far, the monetary base of the Eurosystem is suffering from unprecedented impact and erosion, and still faces the danger of further deepening and expanding, thus, efforts must be made to reconstruct.
It should be noted that the COVID-19 pandemic has strengthened the internal cooperation of EU members and once made significant progress on financial matters such as debt. Since the outbreak of the Russia-Ukraine conflict, there are different voices within the EU around several rounds of sanctions against Russia, and the difference between the positions of member states towards Russia has increased, as their economic security is at stake. From the political point of view, the sanctions against Russia have already hurt the EU itself; along with the further deterioration of the economic situation, the conflict within the EU countries will be more visible, which will undoubtedly further damage the political stability of the eurozone and undermine the EUR as the most important political foundation of Europe. Cooperation is crucial to the stability and development of the EU, and is important for strengthening the financial base of the EUR and building up market expectations. The EU must carry out useful internal coordination, as soon as possible to stop the damage to the EUR, and to avoid the "Ruble Settlement Order" and other waves of impact or long-term erosion.
Over the years, it is a basic fact that the center of the European economy has shifted eastward, both in terms of labor, land, and other considerations, as well as energy and raw material supply. The problem lies precisely in the fact that the center of European economic integration has shifted eastward, but political differences continue to widen, the core of which is the relationship with Russia. Europe's position is that it wants to move east economically and also supports NATO's eastward expansion. By extension, Europe needs Russia for energy and economy, but European security excludes and targets Russia, or even sees Russia as an imaginary enemy. As a result, the center of European economic integration has shifted firmly to the east, and political confrontation has continued to escalate, causing geopolitical conflicts to worsen. Torn political positions and serious geopolitical conflicts are bound to have an unbearable impact on the foundations of the European monetary economy. Since the EUR has joined the sanctions against Russia. Technically and politically, it is inevitable that the EUR will be rejected by Russia. Gone are the good days of having the same goal of "de-dollarization" for the EUR and ruble, and the economic relations between Russia and Europe are facing a comprehensive revaluation and reconstruction, which forces the EUR to review and reflect on itself and reconstruct its monetary base.
The EU takes unity, peace, and green as its three major goals, all of which require the EU to establish a solid and sustainable cooperative development relationship with Russia. Without Russia's energy support, a green Europe would be a mirage. Without stable relations with Russia, peace in Europe is also a castle in the air. The complex and diverse system of bilateral relations between EU members and Russia needs to strengthen rather than weaken Russian-European relations, and promote intra-European coherence rather than widen differences. If the economic, trade and investment relations with Russia cannot be fully repaired and the political relations between Russia and Europe cannot be stabilized, the eurosystem will fail to take up the ambitious and long-term socio-economic goals of the EU, and the EUR will become more inward-looking and conservative, with its international influence diminished and the socio-economic development of the EU weakened.
It should be noted that Europe, which cannot be independent in energy, food, raw materials, and security, is dragged down by these incidents. Its monetary system is not only unable to serve as a spare tire for the USD internationally, but it will also be quite difficult to find a foothold in the future turmoil of global economic inflation, stagnation, and recession. Over the past 23 years, despite its short history of growth, the EUR has been challenged by many crises or shocks. However, the EUR is now in the midst of unprecedented crises and difficulties, and steady progress requires a realistic stance of economic priority to unite political will and reconstruct its monetary base.
Source: FT Chinese