International role of Euro

From the stary: The European Union (EU) launched the euro almost 20 years ago, and many hoped it would do what none other could, in the post-war perio

International role of Euro

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• From the stary: The European Union (EU) launched the euro almost 20 years ago, and many hoped it would do what none other could, in the post-war period: challenge the mighty American dollar. However, most of the world's reserve managers did not stop trusting the US dollar. Europe is again pushing its euro now.
• Latest step: On June 15th, $20bn worth of bonds was issued as part of the Next Generation EU (NGEU) scheme to boost European economies. Those bonds could be seen by investors as a safe asset of choice, perhaps equal to the American Treasury bonds.
• On currencies: Currencies exist to facilitate the transactions of people and businesses within the borders of their nations. Having an international presence helps in many ways. For companies, doing imports and exports denominated in their local currency (and not the dollar) means less disruption when exchange rates move up and down. So, issuing a currency that foreigners want to hold makes it easier for governments to raise money from them at cheap rates. So the cost of borrowing for firms and banks goes down.
• Euro's present status: The euro is easily available outside the 19 countries that formally use it. About two dozen countries link their own currencies to it, mainly former European colonies and neighbours. Between a third and half of all euro banknotes by value are held outside the euro area, according to the European Central Bank (ECB). Around a fifth of all foreign-exchange reserves accumulated by central banks, and a similar percentage of cross-border loans and bonds, are denominated in euros. With a 60% share, the US dollar is way ahead. The euro’s share of payments for transactions is much closer to that of the dollar because the EU is the world’s biggest importer and exporter of goods and services. But commodities like oil remain mostly priced in dollars.
• History: By 2007 the euro became the most popular currency in which to issue foreign-currency-denominated debt (by multinationals). Then came the financial crisis of 2007! Everyone fell back on the dollar as the currency of choice. And then came the European sovereign debt crisis, convincing investors that they were right not to trust the euro over the dollar.
• Two things changing:

1. FIRST: In 2021, America’s changing attitude to international economic policymaking (jingoist protectionism) was not compatible with the obligations on the issuer of the world’s reserve currency. Even under the Biden regime, Europe now is concerned its interests may not align with America’s. Euro-zone leaders now say boosting the currency’s international use would help them achieve “strategic autonomy”. America has used the need of big banks to have access to dollars to police their behaviour far beyond its shores (e.g. in getting sanctions imposed on Iran). Firms that refuse are fined heavily by America (even European ones). This is the weaponisation of the dollar.
2. SECOND: Whereas the last global recession brought the euro to the precipice, today the swift actions of the ECB and national governments to support their economies were well received. It boosted the credibility of the euro in a crisis—a key attribute of a global currency. A big step was the creation of the NGEU scheme and the subsequent bond issuance. The bonds are effectively backed by the balance-sheet of all EU member states, thus making them roughly akin to America’s Treasury bonds. This is new for Europe, where borrowing has been done by national governments, whose creditworthiness varies. The new pan-EU bond creates a way for investors to save in euros without taking credit risk.

• Summary: The rise of digital currencies issued by central banks, which the ECB is planning, may result in a new equilibrium where many currencies share global reserve-currency status. That could include China’s yuan also, presently not convertible. The world will be where it was before the second world war where multiple currencies — the dollar, sterling and the French franc among them — held joint dominance. 

 

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