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: Macroeconomic policy

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 Download PDF More by this author
 

Parliamentary Testimony

United States Senate

China's non-market practices, impact on the world, and what to do about it?

Testimony before the U.S.-China Economic and Security Review Commission.

By: Alicia García-Herrero Topic: Global economy and trade, Testimonies, United States Senate Date: June 27, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

Understanding Sri Lanka's current crisis

What needs to be done to address the Sri Lankan crisis and how does it relate to China?

By: The Sound of Economics Topic: Global economy and trade Date: June 23, 2022
Read article More on this topic
 

Blog Post

A new kind of Belt and Road Initiative after the pandemic

The Belt and Road Initiative is turning from infrastructure financing into an instrument for Chinese soft and hard power

By: Alicia García-Herrero and Eyck Freymann Topic: Global economy and trade Date: June 23, 2022
Read article More by this author
 

Blog Post

European governance

Discretion lets Croatia in but leaves Bulgaria out of the euro area in 2023

Crucial decisions about whether a country can join the euro area depend on questionable discretionary decisions.

By: Zsolt Darvas Topic: European governance, Macroeconomic policy Date: June 22, 2022
Read article Download PDF
 

External Publication

European governanceEuropean Parliament

Fragmentation risk in the euro area: no easy way out for the European Central Bank

The ECB should design a specific tool that will accompany interest rate hikes to neutralise the risk of fragmentation directly for countries facing it, staying within the bounds of the EU treaties and ensuring political legitimacy. We also advocate structural changes to the ECB’s collateral framework to avoid unnecessary uncertainty surrounding the safe asset status of European sovereign bonds.

By: Maria Demertzis, Grégory Claeys and Lionel Guetta-Jeanrenaud Topic: European governance, European Parliament, Testimonies Date: June 8, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

Is China bailing Russia out?

The mystery of China-Russia economic relations in the aftermath of Russia’s invasion of Ukraine and what it means for Europe.

By: The Sound of Economics Topic: Global economy and trade Date: June 8, 2022
Read article More by this author
 

Opinion

European governance

Three headaches for the European Central Bank

Even though inflation in the euro area is lower than in the US, three issues make it a lot more difficult for the ECB to control inflation and preserve financial stability. Once again, the limits of EMU architecture are visible and will require a rethink.

By: Maria Demertzis Topic: European governance, Macroeconomic policy Date: May 31, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

Taming inflation?

What are the implications of prolonged inflation?

By: The Sound of Economics Topic: Macroeconomic policy Date: May 25, 2022
Read article More on this topic More by this author
 

Opinion

Xi, Biden switching strategies for dominance

The US now sees Asia more through an economic lens, while China shifts toward a security focus

By: Alicia García-Herrero Topic: Global economy and trade Date: May 25, 2022
Read about event More on this topic
 

Past Event

Past Event

Is China’s private sector advancing or retreating?

A look into the Chinese private sector.

Speakers: Reinhard Bütikofer, Nicolas Véron and Alicia García-Herrero Topic: Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 18, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

The cost of China's dynamic zero-COVID policy

What does zero-COVID mean for both China and the global economy?

By: The Sound of Economics Topic: Global economy and trade Date: May 11, 2022
Read about event More on this topic
 

Past Event

Past Event

What is in store for Euro area economies?

ECB Executive Board Member Philip Lane discusses the outlook for Euro area economies.

Speakers: Maria Demertzis and Philip Lane Topic: European governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 5, 2022
Load more posts