Opinion

Politics, not economics, demands a strengthened international role for the euro

Not just the EU but also other countries, particularly China, need a defence against weaponisation of the dollar.

By: and Date: October 28, 2020 Topic: European Macroeconomics & Governance

This opinion piece was originally published in Il Sole 24 Ore, Asia Times and El Confidencial.

logo of Il Sole 24 Ore Italian newspaper

 

 

Since the launch of the euro, much attention has been focused on the international role it might play. Seen from the outside, a single European currency should have become a rival to the dollar. From the inside, though, the notion of the euro becoming a major reserve currency was not a stated European objective. Market forces would be left to decide its fate.

Two decades on, however, the world feels under pressure to take sides in the growing strategic competition between China and the United States. The European Union is waking up to the reality of a stuttering Transatlantic Alliance and an increasingly assertive China. Among the tools the EU has to protect, and possibly regain some of, its lost economic sovereignty, fostering the euro´s role as an international currency is one of the most obvious. Interestingly, at the current juncture, it is not only the EU that needs the euro to support its strategic autonomy. So does the rest of the world, particularly China and any country that fears US weaponisation of the dollar. This also means that economic fundamentals might not the key factor behind the push for greater international use of the euro. Geopolitics seems to be taking the front seat.

The euro is already the second most internationally-traded currency after the dollar, but it still lags in terms of some of the key functions of an international currency, such as serving as a reference for private and official use. Commodity markets and other currencies outside the euro area do not choose the euro as a reference to set their prices. Furthermore, the euro’s international role took a big hit during the European sovereign debt crisis a decade ago, when the single currency’s survival was at risk and euro-denominated cross-border settlements fell substantially. One could argue that this was a reflection of market forces: the incumbent´s advantage and, especially, the euro area’s smaller share of the global economy. Furthermore, the US is a massive net international debtor, with non-residents holding a huge pool of liquid financial assets. This is certainly not the case for the euro area, which is still a net external creditor and has fragmented capital markets.

Beyond economic factors, the euro has also lacked the political support to become a more entrenched reserve currency, something that became very evident during the euro-area sovereign debt crisis. But things have changed. The erosion of the so-called liberal economic order, the increasingly hostile external environment and the fear that EU countries might take different sides in the China-US competition, have alerted the bloc’s leaders to the urgent need to boost economic (and technological) sovereignty. The euro is one of the remaining reliable foundations to build upon. This means that having an international currency is no longer a risk to price stability, as the European Central Bank might have thought at the time of the euro’s inception, but rather an opportunity to exert economic power beyond borders.

The question is whether actions are being taken in line with the domestic and external needs for the euro to acquire a greater international role. The answer is yes on both fronts. Internally, the ECB is reacting much more aggressively to the COVID-19 pandemic than it did during the European sovereign debt crisis, by providing temporary unlimited liquidity and a backstop to public debt. Furthermore, it has also extended swap lines to a number of central banks outside the euro area, following the Fed’s example. In addition, an EU-level risk-free asset is about to be created for the financing of the EU’s €750 billion recovery fund. Externally, China and Russia have been diversifying away from the US dollar, when one looks at their holdings of US government paper and dollar assets in their reserves.

It goes without saying that more steps are needed to boost the euro as an international currency, but more economic steps might not offer the full answer. A more united foreign policy seems to be the crucial factor that would further push for economic – and other forms of – sovereignty.

All in all, the time might have arrived for a more internationalised euro, because of the EU’s quest for strategic autonomy, and because of the need for China and other emerging countries threatened by the US weaponisation of the dollar, to find an alternative currency to trade with. The euro, an orphan currency at its inception, can thus find more backing now than could previously have been imagined. It is all about lack of options, internally and externally.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic More by this author
 

Opinion

Grading the big pandemic test

COVID-19 almost one year on, it is time to assess who passed the test, and who failed.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: November 27, 2020
Read article More on this topic
 

Blog Post

Europe is losing competitiveness in global value chains while China surges

The European Union owes much of its economic weight to its regional value chain and integration into the global value chain. But the EU’s global value chain role is shrinking, and while EU trade integration with China is increasing, it is mainly to China’s benefit, undermining the EU’s external competitiveness.

By: Alicia García-Herrero and David Martínez Turégano Topic: Global Economics & Governance Date: November 27, 2020
Read article Download PDF More by this author
 

Parliamentary Testimony

European Parliament

Euro area accession countries in the context of the pandemic

Testimony before the European Parliament on the subject of euro area accession.

By: Zsolt Darvas Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: November 19, 2020
Read about event More on this topic
 

Past Event

Past Event

How to keep a competitive environment while engaging with non market economies?

How can we ensure fair competition between European firms and Chinese state-backed players?

Speakers: Julia Anderson, Helge Berger, Michiel Boots, Alicia García-Herrero, Carles Esteva Mosso, Frédéric Jenny, Georgios Petropoulos, Cian Ruane, Hylke Vandenbussche and Guntram B. Wolff Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 19, 2020
Read article More by this author
 

Podcast

Podcast

Sizing up the world's largest trade deal

What should be Europe's strategy towards the Regional Comprehensive Economic Partnership (RCEP)?

By: The Sound of Economics Topic: Global Economics & Governance Date: November 18, 2020
Read article More on this topic More by this author
 

Opinion

RCEP might not stop reshuffling of Asian value chains

China is no doubt bound to benefit, but other members of the regional trade pact may benefit even more

By: Alicia García-Herrero Topic: Global Economics & Governance Date: November 17, 2020
Read article Download PDF More on this topic
 

External Publication

Hong Kong’s Intermediary Role on Funding the BRI: How does it fare against Singapore?

A look into the intermediary role of Hong Kong in financing cross-border Belt and Road Initiative projects and compare it with Singapore, a similar offshore financial center and competitor.

By: Alicia García-Herrero, Gary Ng and Hanrui LI Topic: Global Economics & Governance Date: November 4, 2020
Read article More on this topic More by this author
 

Opinion

Fifth Plenum maps China’s response to a more hostile world

'The Communist Party has acknowledged that the outside world now is more of a risk than an opportunity.'

By: Alicia García-Herrero Topic: Global Economics & Governance Date: November 3, 2020
Read article More on this topic More by this author
 

Opinion

China's yuan nowhere near cracking US dollar hegemony

For all Beijing's ambitions of cracking the hegemony of the US dollar in the face of Trump administration sanctions, the yuan still has a long way to go.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: October 30, 2020
Read article More on this topic More by this author
 

Opinion

Globalisation needs rebuilding, not just repair

An attempt merely to restore the pre-Trump status quo would fail to address major challenges; the task ahead is one of rebuilding, rather than repair. It should start with a clear identification of the problems that the international system must tackle.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: October 29, 2020
Read article More on this topic More by this author
 

Opinion

ECFA重要性遞減 台灣出口未來關鍵 在保持科技優勢和出口多元化

從地緣政治角度來看,ECFA自動延續無疑是個好消息,但協議對台灣經濟的直接影響較過去變得有限。雖然台灣對中國大陸的出口仍然重要,但ECFA占整體出口的重要性因資通訊科技產業快速發展而縮小。由於台灣在全球製造業供應鏈遷移和價值鏈重組中占有重要位置,未來對美國和東南亞出口預計將會加速。

By: Alicia García-Herrero Topic: Global Economics & Governance Date: October 20, 2020
Read article More on this topic
 

Blog Post

For the euro there is no shortcut to becoming a dominant currency

As an international currency, the euro has always been a distant second to the dollar. The idea of a greater international role for the euro has been floated, but without major institutional reform, the euro will not become a dominant currency.

By: Grégory Claeys and Guntram B. Wolff Topic: Global Economics & Governance Date: October 13, 2020
Load more posts