The European Monetary Union (EMU) is often seen as an attempt to shield Europe from USD dominance. However, as BIS data shows, the USD’s volume and share in EMU cross-border payments has been constantly rising for 15 years. To explain this puzzle, we adopt the New European View and posit that the EMU has systematically incorporated the USD into its monetary architecture rather than competing with it. We trace the origins of this setup by investigating the evolution of institutions for clearing and settlement of cross-border payments in Europe. We find that the USD’s integral role results from a process of “subordinate financial integration” after 1945 when the European Payments Union connected non-convertible European currencies and defined them as promises to pay USD on the BIS balance sheet. After 1958, a parallel structure emerged: The “domestic currency channel” allowed making cross-border payments in European currencies but subject to exchange rate fluctuations; private agents organized first resort clearing, central banks provided last resort clearing via the BIS. In contrast, the “key currency channel” facilitated cross-border payment in USD deposits created offshore; clearing shifted from London to New York in the 1960s after setting up CHIPS. The 1999 EMU introduction boosted the “domestic currency channel” by providing an integrated payment system and eliminating exchange rate fluctuations, but the Eurocrisis reinvigorated the legacy structure of the “key currency channel”. Handsomely backstopped via Federal Reserve swap lines, the USD currently has a revival in the EMU as a feature, not a bug.
Torsten Ehlers, Bank for International Settlements
