ECB Lagarde: Bigger Global Role for Euro May Take Policy Measures, Reform Efforts

2 June 2021

By David Barwick – FRANKFURT (Econostream) – The fact that the euro’s international importance, though not high, emerged unscathed from the turbulence of 2020 may indicate that a larger global role for the common currency could only be the result of additional policies and reforms, according to European Central Bank President Christine Lagarde on Wednesday.

In the foreword to the ECB’s latest report on the international role of the euro, Lagarde said that despite the pandemic and its economic and policy impact, ‘these developments did not result in a significant change in the international role of the euro.’

This resilience contrasts with the experience of the sovereign debt crisis, she noted, and ‘may reflect the effectiveness of the unprecedented policy support measures and coordinated approach that have prevailed in the euro area during the COVID-19 crisis.’

‘At the same time, the fact that the global appeal of the euro remains broadly stable at a low level suggests that only further resolute policy measures and reform efforts would enable the euro to realise its global potential’, she said.

According to the report, a composite index measuring the currency’s global role in 2020 shed 0.3 percentage points after adjustment for exchange rate valuation effects and was unchanged on an unadjusted basis.

The share of the euro across various indicators of international currency use was close to historical lows, averaging around 19%’, the report said. ‘The euro remained unchallenged as the second most important currency in the international monetary system.’

The euro’s share of foreign exchange reserves worldwide dropped 0.7 percentage points, with the dollar’s share stable, the report said. Relatively low euro area interest rates may have dissuaded euro-denominated bond holdings, it said.

As a percentage of debt issued in foreign currency, the euro’s share was down two points, according to the report. Lower risk aversion in the third quarter, along with favourable financing conditions, sparked higher issuance by emerging markets that tend to issue in dollars, the report noted.

The euro’s share of international deposits also fell last year, by about 3 percentage points, versus what the ECB called a sizeable increase for the dollar. This was partly because non-bank financial institutions sold less liquid assets after the outbreak of the pandemic and deposited the proceeds in dollar accounts, the report said.

Demand for euro banknotes outside the euro area contracted by about two percentage points, while euro-denominated transactions outside the region were only half the previous level as countries closed their borders in a response to the pandemic, according to the report.

Other indicators of the international use of the euro held up better, the report said, citing its share of international loans by banks outside the euro area to non-euro area borrowers; its use as an invoicing currency for extra-euro area imports of goods; its role in international debt securities; and green bond issuance, over half of which was in euros.