Also other indicators of the international use of the euro turned to or remained in positive territory in 2013. Foreign demand for euro banknotes increased for a third consecutive year and the sovereign debt crisis had no impact on the use of the euro as parallel currency in central, eastern and south-eastern Europe.

The report also observes that the international use of the euro declined in other market segments. The euro’s share in global foreign exchange reserves decreased by 0.9 percentage point (at constant exchange rates) in 2013 to 24.4%. This notwithstanding, the euro continued to perform its function as a credible store of value for foreign central banks as the second most important international reserve currency. As regards international debt markets, the share of the euro as an international financing currency declined by 1.4 percentage points (at constant exchange rates), to 25.3%. In this market segment, the euro’s share decreased in tandem with that of the Japanese yen and those of the “other” currencies.

The latter developments may be the result of several factors, including structural shifts in the global monetary and financial system, as well as the lingering effects of the euro area sovereign debt crisis. The on-going adjustment and rebalancing process in the euro area and the moves towards a genuine Economic and Monetary Union, including the completion of the banking union, remain therefore of the essence.

The report’s first special feature article analyses the role of foreign investors for the international use of the euro at the peak of the euro area sovereign debt crisis. It finds that foreign investments in the bond markets of stressed euro area countries were disproportionately small relative to the predictions of a standard benchmark model of international portfolio allocation, but that this underinvestment disappeared after the announcement of the ECB’s OMT programme.

The second special feature provides an overview of the academic literature on the global financial impact of official reserve diversification. It shows in particular that the impact of reserve diversification on global foreign exchange markets is not mechanical, but that it depends on an array of factors, including the degree of substitutability between reserve assets and related changes in interest rates as well as the reaction of private investors.

The third special feature highlights a number of stylised facts on foreign currency bond issuance. It finds that gross bond issuance has reached unprecedented levels since the global financial crisis and that an increasingly large fraction of bonds have been issued in foreign currency, especially in emerging markets.

Report