22 August 2019

Jacques Delors Institute: International Role of the Euro

Relative to the economic weight of the euro area, the euro underperforms as a global currency, coming in a distant but solid second place to the US dollar. In the current global context, where traditional alliances and the rules-based economic order itself are increasingly under strain, improving the international standing of the euro has become not only a question of economic benefit, but also of bolstering European economic sovereignty. A stronger global euro can act as a counterweight to the ‘weaponisation’ of economic clout (e.g. through sanctions) by other major powers, increase EU autonomy and resilience, and provide a source of stability and diversification for its trading partners.

Although a greater international role for the euro has never been more worth striving for, there are major roadblocks that stand in the way: the existing dollar inertia in international trade and finance, the shortage of euro area safe assets, a lack of deep and liquid euro capital markets, and lingering euro area breakup risk. There are also operational challenges that would arise with a more global euro, namely the challenge of a stronger euro for export-oriented growth models, an increased strain on the supply of safe assets, and new institutional demands that would fall on the European Central Bank (ECB).

This paper draws the following main conclusions:

• Given the strength of the current dollar inertia, a market-led initiative is unlikely to be sufficient to drive greater use of the euro abroad. Greater international use of the euro requires active supporting policies at the European level, including the establishment of euro benchmarks in critical markets, improvements in the eurozone architecture, and geopolitical outreach.

• Strengthening the stability, resilience and credibility of the euro area is an essential prerequisite to improving the international standing of the euro. The most essential measures are increasing the supply of euro safe assets (ideally with a common safe asset), making concrete progress on the Capital Markets Union, and reducing breakup risk by demonstrating a credible political commitment to the common currency and dealing with remaining sources of systemic risk.

• The ECB will need to be prepared to embrace the ‘exorbitant duty’ of issuing a global currency, i.e. by providing euro liquidity to third countries and taking into account both the larger impact of its actions on foreign markets as well as the larger impact of foreign markets on the euro area.

Full paper

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