Study Notes on Bucking the Buck by Daniel McDowell

In April 2018, European leaders (Emmanuel Macron, Angela Merkel, and Boris Johnson) attempted to persuade U.S. President Donald Trump to remain in the Joint Comprehensive Plan of Action (JCPOA) with Iran.
May 8, 2018: Trump announced U.S. withdrawal from the JCPOA.
  - European leaders condemned this decision.
  - Major publication Die Zeit tweeted: "Trump destroys the liberal world order."
  - Merkel described it as putting the multilateral global order in a "real crisis."
  - Macron expressed regret and warned it would increase global dangers.
European policymakers began to target the U.S. financial system and the dollar.
  - Heiko Maas (German Foreign Minister) emphasized the need for European financial autonomy.
  - Bruno Le Marie (French Finance Minister) asserted the goal of a sovereign Europe with independent financing.
  - Jean-Claude Junker (European Commission President) stressed the need for the euro to play a significant global role.

The U.S. withdrawal from the JCPOA reinstated sanctions against Iran and led to secondary sanctions affecting third-party firms interacting with Iran.
European firms faced a dilemma: either continue with Iranian business and risk U.S. blacklisting or abandon investments.
- Due to the dollar's centrality, firms chose to withdraw from the Iranian market.
The dominance of the dollar allows the U.S. to use it as a foreign policy tool, creating discussions around the euro's role to minimize future risks.
Obama and Kerry warned that withdrawal from the JCPOA could lead to questions regarding the dollar's global reserve status.

Critique of arguments suggesting the dollar has invulnerability:
- Critics argued the idea that dollar dominance would vanish due to geopolitical forces was exaggerated.
- Economists downplayed political rhetoric about the dollar's status.
Jack Lew (former U.S. Treasury Secretary) described sanctions as a risk to future dollar dominance.
Gita Gopinath (IMF) warned U.S. sanctions could lead to a fragmented monetary system.
- Other economists predicted a bipolar monetary order as a result of U.S. actions.

Literature in International Political Economy (IPE) suggests that political relationships affect currency status and power.
- Historical context: currencies benefit from strong state relationships (e.g., Britain's pound).
Current sanctions can lead to de-dollarization, motivating countries to adopt anti-dollar policies.
Examples:
- Countries like Venezuela, Turkey, and Iran have criticized dollar reliance in response to sanctions.

The central claim: U.S. financial sanctions generate political risk, leading countries to consider reducing dollar dependency.
- Political risk is defined as the potential for sanctions to increase costs related to using the dollar.
Successful anti-dollar policies indicate a shift toward de-dollarization, not its immediate conclusion.
- Empirical evidence from the last two decades demonstrates the increase in sanctions adopted by the U.S.

Financial sanctions can be categorized into primary and secondary sanctions.
- Primary sanctions: isolate targets from the dollar-based financial system (e.g., OFAC's SDN list).
- Secondary sanctions: impact third-party institutions conducting business with sanctioned entities, creating compliance pressure on global banks.
History of sanctions: U.S. has increasingly relied on this tool post-9/11, with sanctions being served frequently during the Obama and Trump administrations.

Increased U.S. sanctions heighten global perceptions of dollar political risk.
Countries targeted or fearing sanctions are more likely to seek alternative currencies to mitigate their risks.
Notably, nations previously unaffected might also take action due to secondary sanctions—illustrating a broadening fear regarding dollar misuse.
The conclusion suggests that while sanctions wield significant power, excessive reliance on them could diminish the dollar’s long-term role as the world’s primary reserve currency.