By David Barwick – FRANKFURT (EconoStream) – The European Central Bank must take into account the potential monetary policy ramifications of greater international use of the euro, even as the institution is an important contributor to the policy mix supporting a bigger global role for the common currency, ECB Executive Board member Fabio Panetta said Tuesday.

In a video meeting with members of the European Parliament, a text of which was made available by the ECB, Panetta spoke of ‘the euro’s untapped potential at global level’ and, in general terms, about how an enhanced global role of the common currency could influence monetary policy.

‘…international currency status strengthens the transmission of monetary policy, notably if stronger use of a currency as an international funding unit amplifies the cross-border effects of monetary policy impulses’, he said. Spillback effects could amplify the domestic impact of monetary policy, especially in a relatively open economy like the euro area, he said.

Greater global use of a currency also reduces pass-through via the exchange rate along with external financing costs, he said. As the euro’s global role changes, the ECB must understand and consider such effects in terms of monetary policy, he said.

Panetta repeated comments he made on June 12 about enhancing the international standing of the common currency, arguing that ‘euro’s global potential has not been fully realized’ but that ‘the right policies could unleash it.’

A better sharing of the advantages of the euro across the area would buttress its wider use, he said. Policies must mitigate the skewing of benefits accruing from the euro’s global role in favor of those member states that issue assets seen as safe in times of crisis, he said. This can be accomplished by appropriate joint European instruments, he said, again praising proposals for a €750 billion recovery fund as ‘an excellent example’, albeit too temporary and too small relative to the European sovereign bond market.

Standing behind a global currency must be a central bank that ‘acts as a credible backstop to safeguard liquidity conditions in the financial system’, he said.