02 July 2013

ECB Review: The international role of the euro

The report finds that in 2012 the financial crisis continued to weigh on the international use of the euro, which declined moderately in some market segments. The persistent fragmentation of the euro area financial system is one of the main underlying causes of these developments, as it affects the depth and liquidity of euro area capital markets.

Nevertheless, survey indicators point to some strengthening with regard to the international role of the euro during the second half of 2012. This development was supported by several policy measures taken at the EU level, demonstrating the strength of cohesion within Europe. Furthermore, policies at the national level helped to restore market confidence towards the end of the period covered by the review, i.e. essentially 2012. However, further efforts are needed at both the euro area and the national level to tackle the fundamental causes of the financial fragmentation in the euro area, and a strengthening of the institutional framework of Economic and Monetary Union will also make a positive contribution to this end.

The share of the euro in globally disclosed foreign exchange reserves declined in 2012 by around 1 percentage point, from 25.1 per cent to 23.9 per cent (adjusted for valuation effects). Survey evidence suggests that concerns among foreign reserve managers related to the euro area sovereign debt crisis had been alleviated by early 2013, however. Among emerging and developing economies, some portfolio rebalancing occurred, which resulted in the weight of the euro in emerging market reserves being aligned more closely with that in total global reserves for which the currency composition is known.

In international debt markets, the share of the euro declined by 0.7 percentage point in 2012, from 26.2 per cent to 25.5 per cent, as tensions in the euro area sovereign debt market possibly dented the appetite for new international debt issuance denominated in euro. Funding cost considerations continued to favour issuance of debt securities denominated in US dollars, rather than those denominated in euro.

Regarding currency substitution in 2012, statistics on net shipments of euro banknotes to destinations outside the euro area suggest that foreign demand for euro banknotes increased further in 2012. This implies that the intensification of the euro area sovereign debt crisis did not have a major impact on the use of euro banknotes outside the euro area.

With respect to the use of the euro as a parallel currency in central, eastern and south-eastern European (CESEE) countries, the euro’s share in total foreign deposits declined marginally in 2012, by 0.3 percentage point. Evidence from household surveys in the region provided by the Oesterreichische Nationalbank suggests that trust in the euro in CESEE countries, which decreased in spring 2012, recovered in the autumn of that year.

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